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    MCK
    Earnings call· Dec 2024(Q3 FY25)

    MCKESSON CORP MCK

    Feb 5, 2025 Source

    Executive summary

    McKesson Q3 FY25 — Strong Profit Growth and Strategic Expansion into Ophthalmology

    McKesson delivered strong Q3 FY25 results, driven by robust performance in its U.S. Pharmaceutical and Prescription Technology Solutions segments, leading to a raised full-year adjusted EPS outlook. The company is strategically expanding its specialty services platform with the acquisition of PRISM Vision in ophthalmology, mirroring its successful oncology strategy. While the Medical-Surgical segment faced headwinds from a softer illness season, McKesson is implementing cost optimization initiatives and remains confident in its diversified portfolio and long-term growth trajectory.

    Highlights

    5

    • Revenue grew 18% to $95.3 billion.

    • Adjusted operating profit grew 16% to $1.5 billion, with double-digit growth in U.S. Pharmaceutical and Prescription Technology Solutions.

    • Full-year adjusted EPS guidance raised and narrowed to $32.55-$32.95, representing 19%-20% year-over-year growth.

    • U.S. Oncology Network expanded to over 2,750 providers across 640 sites in 31 states, with patient accruals through clinical trials increasing 25% within SCRI.

    • Operating expense to gross profit ratio improved over 250 basis points year-over-year.

    Concerns

    4

    • Medical-Surgical revenue decreased 3% to $2.9 billion due to lower-than-anticipated volumes from a softer illness season.

    • Illness severity was approximately 62% of the average of the previous 5 non-COVID illness seasons, impacting primary care foot traffic.

    • Effective tax rate was 23.9% compared to 10.6% in the prior year, due to discrete items.

    • Negative free cash flow of $2.6 billion in the quarter, primarily due to a $2 billion timing shift to Q4.

    Guidance & targets

    22
    CategoryTargetConfidence
    Adjusted EPS
    $32.55 to $32.95
    high materiality
    High
    Revenue Growth
    16% to 18%
    high materiality
    High
    Operating Profit Growth
    13% to 15%
    high materiality
    High
    U.S. Pharmaceutical Revenue Growth
    18% to 20%
    medium materiality
    High
    U.S. Pharmaceutical Operating Profit Growth
    11% to 13%
    medium materiality
    High
    Prescription Technology Solutions Revenue Growth
    9% to 12%
    medium materiality
    High
    Prescription Technology Solutions Operating Profit Growth
    12% to 15%
    medium materiality
    High
    Medical-Surgical Solutions Revenue Growth
    roughly flat
    medium materiality
    Medium
    Medical-Surgical Solutions Operating Profit Growth
    roughly flat
    medium materiality
    Medium
    International Revenue Growth
    3% to 7%
    medium materiality
    High
    International Operating Profit Growth
    10% to 14%
    medium materiality
    High
    Corporate Expenses
    $480 million to $520 million
    low materiality
    High
    Interest Expense
    $255 million to $265 million
    low materiality
    High
    Income Attributable to Noncontrolling Interest
    $185 million to $195 million
    low materiality
    High
    Effective Tax Rate
    17% to 19%
    low materiality
    High
    Free Cash Flow
    $4.8 billion to $5.2 billion
    high materiality
    High
    Share Repurchases
    approximately $3.2 billion
    high materiality
    High
    Weighted Average Diluted Shares Outstanding
    approximately 128 million
    low materiality
    High
    Long-term Adjusted EPS Growth Rate
    12% to 14%
    high materiality
    High
    PRISM Vision Adjusted EPS Accretion
    $0.20 to $0.30
    medium materiality
    High
    PRISM Vision Adjusted EPS Accretion
    $0.65 to $0.75
    medium materiality
    High
    Medical-Surgical Cost Optimization Savings
    $100 million
    medium materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    U.S. Pharmaceutical
    Revenue growth was led by higher volumes from retail national account customers and growth from specialty product distribution, including oncology and specialty provider settings. This was partially offset by anticipated declines of certain brand volumes due to formulary changes.
    Operating Profit Growth: 14%GLP-1 Revenues: $10.9 billionGLP-1 Revenue Growth: 45% YoYU.S. Oncology Network Providers: >2,750U.S. Oncology Network Sites: 640U.S. Oncology Network States: 31U.S. Oncology Network Same-Site Visits Growth: 6%
    		$87.1 billion19%—$944 million
    Prescription Technology Solutions
    Organic and new program growth across access and affordability solutions led to strong performance. Results reflect increased prescription transaction volumes, higher demand for prior authorization services (including for GLP-1 medications), and growth in the third-party logistics business.
    Operating Profit Growth: 22%Prescription Transaction Volumes: IncreasedAccess and Affordability Support: For pharma brands across 30 indications and >12 therapeutic areas
    		$1.4 billion14%—$235 million
    Medical-Surgical Solutions
    Revenue decline was attributable to lower levels of seasonal vaccines, illness testing, and related medical-surgical supplies due to a softer illness season. Operating profit increased due to operational efficiencies from cost optimization initiatives and growth in the Extended Care business, partially offset by lower primary care contributions.
    Operating Profit Growth: 4%Illness Severity: ~62% of average of previous 5 non-COVID seasons
    		$2.9 billion-3%—$294 million
    International
    Driven by higher pharmaceutical distribution volumes in the Canadian business. Operating profit included accretion from held-for-sale accounting related to the divestiture of Rexall and Well.ca businesses, completed on December 30, 2024.
    Operating Profit Growth: 18%Earnings Accretion from Divestiture: $19 million or $0.11/share
    		$3.9 billion6%—$124 million

    Operational metrics

    19
    Consolidated Revenue
    $95.3 billion18% increase
    Q3 FY25

    Record quarterly revenue.

    Consolidated Adjusted Operating Profit
    $1.5 billion16% increase
    Q3 FY25

    Record quarterly operating profit, with growth across all segments.

    Gross Profit
    $3.3 billion7% increase
    Q3 FY25

    Primarily from specialty distribution and provider growth in U.S. Pharmaceutical and growth in Prescription Technology Solutions.

    Operating Expenses
    $1.9 billion2% increase
    Q3 FY25

    Driven by higher expenses to support growth in the U.S. Pharmaceutical segment.

    Interest Expense
    $62 millionincreased
    Q3 FY25

    Resulting from higher average balances of loan portfolio during the quarter.

    Diluted Weighted Average Shares Outstanding
    126.6 million5% decrease
    Q3 FY25

    Lower share count contributed to EPS growth.

    Adjusted EPS
    $8.034% increase
    Q3 FY25

    Year-over-year growth driven by strong operational performance and lower share count, partially offset by higher tax rate.

    Cash and Cash Equivalents
    $1.1 billion
    End of Q3 FY25

    Balance at quarter end.

    Capital Expenditures
    $196 million
    Q3 FY25

    Investments to support growth priorities.

    Cash Returned to Shareholders
    $919 million
    Q3 FY25

    Includes share repurchases and dividend payments.

    Share Repurchases
    $827 million
    Q3 FY25

    Part of capital return to shareholders.

    Dividend Payments
    $92 million
    Q3 FY25

    Part of capital return to shareholders.

    McKesson Ventures Equity Investments Gain
    $6 millioncompared to $8 million loss in Q3 FY24
    Q3 FY25

    Pretax gain related to equity investments within McKesson Ventures portfolio.

    Strategic Partnership Incremental Revenue
    approximately $32 billion
    Full-year FY25

    Contribution from a new strategic customer onboarded in July, incorporated in full-year outlook.

    SCRI FDA Approved Therapies Participation
    33out of 47 approved by FDA
    Last year

    Sarah Cannon Research Institute participated in the development of a significant number of FDA-approved therapies.

    PRISM Vision Providers
    180
    Current

    Number of providers affiliated with PRISM Vision.

    PRISM Vision Office Locations
    91
    Current

    Number of office locations affiliated with PRISM Vision.

    PRISM Vision Ambulatory Surgery Centers
    7
    Current

    Number of ambulatory surgery centers affiliated with PRISM Vision.

    Cost Optimization Initiatives Savings
    $100 million
    FY25 H2

    Expected cost savings from initiatives announced in Q1, on track to be achieved.

    Industry KPIs

    5
    MetricValueDetails
    Utilization trendsapproximately 62%%
    Same facility volumes6%%
    Client retention new winsnew strategic customer
    Pharmacy scripts specialty$10.9 billionUSD
    Adjusted EPS EBITDA leverage guidance$32.55 to $32.95USD

    Deals & partnerships

    3
    PRISM VisionAcquiring a controlling interest (80%) in PRISM Vision, a provider of general ophthalmology and retina management services.approximately $850 million

    The transaction is subject to customary closing conditions, including necessary regulatory clearances. PRISM Vision includes 180 providers, 91 office locations, and 7 ambulatory surgery centers. It will be consolidated within McKesson's U.S. Pharmaceutical segment.

    Rexall and Well.caDivestiture of Canada-based Rexall and Well.ca businesses.

    Completed on December 30, 2024. This allows McKesson to focus and prioritize investments in other strategic areas.

    European Business (excluding Norway)Commitment to exit and fully divest the European business.

    Norway remains the only operating country in Europe that McKesson has not entered into an agreement to sell. Contributions from Norway operations are included in FY25 outlook.

    Risks & headwinds

    4
    Softer Illness Season and Primary Care WeaknessQ3 FY25, potentially ongoing

    Medical-Surgical revenue decreased 3% to $2.9 billion; illness severity was approximately 62% of the average of the previous 5 non-COVID seasons.

    Mitigation: Implementing cost optimization initiatives expected to deliver $100 million in savings in H2 FY25; strategically positioned business to focus on alternate site markets.

    Higher Effective Tax RateQ3 FY25

    23.9% in Q3 FY25 compared to 10.6% in prior year.

    Mitigation: The rate was in line with guidance provided at recent investor conferences, implying it was anticipated.

    Public Policy UncertaintyOngoing

    Unquantified

    Mitigation: Company watches public policy closely and aims to educate policymakers.

    GLP-1 Medication Growth VariabilityQuarter-to-quarter

    Unquantified variability

    Mitigation: Anticipate continued GLP-1 medication growth year-over-year, but acknowledge variability.

    What to watch in Q4 FY25

    5

    Medical-Surgical Cost Optimization Savings

    Q4 FY25
    CurrentOn track for $100 million in H2 FY25
    TargetRealization of higher proportion of savings in Q4 FY25

    Why it matters

    These savings are crucial for aligning the Medical-Surgical business with market demand and improving its profitability amidst volume headwinds.

    As we previously guided, we anticipate the cost optimization initiatives will deliver $100 million of cost savings in the second half of fiscal 2025, with a higher proportion coming in the fourth quarter.

    Q&A highlights

    7

    How much of the pharma and specialty growth is due to macro trends versus McKesson's unique business? Are there any concerns for next year, and is IRA impacting the business today?

    Management stated that prescription volumes in pharma have been stable, with strong performance in specialty and oncology, including GLP-1s. They expect the environment to remain steady, with oncology network expansion and same-store patient growth being key drivers. No specific IRA impact was mentioned.

    “I mean I think we've seen pretty stable and consistent overall prescription volume in the pharma segment. The last several quarters, obviously, specialty and oncology in particular, has been strong. We've been benefiting from the growth in GLP-1s.”

    asked by Eric Percher · answered by Brian Tyler

    2 min read6 chapters

    Detailed Narrative

    01

    Strong Q3 Performance & Raised FY25 Outlook

    McKesson reported strong third-quarter results, achieving double-digit growth in operating profits across most segments. This performance led the company to raise and narrow its full-year FY25 adjusted EPS guidance to $32.55-$32.95, representing 19%-20% year-over-year growth. The company highlighted the breadth of its products and services and effective execution against strategic priorities as key drivers for these results.

    02

    Strategic Expansion into Ophthalmology with PRISM Vision

    The company announced the signing of an agreement to acquire a controlling interest in PRISM Vision, a provider of general ophthalmology and retina management services. This acquisition marks an important step in enhancing McKesson's specialty services platform, leveraging a similar strategic approach to its successful oncology platform. PRISM Vision includes 180 providers, 91 office locations, and 7 ambulatory surgery centers, with the transaction expected to be accretive to adjusted EPS post-closing.

    03

    U.S. Pharmaceutical and Oncology Platform Strength

    The U.S. Pharmaceutical segment delivered solid volume growth, particularly in specialty product distribution and oncology. The U.S. Oncology Network expanded to over 2,750 providers across 640 sites, with same-site visits increasing 6%. The Sarah Cannon Research Institute (SCRI) saw a 25% increase in patient accruals through clinical trials and participated in the development of 33 of 47 FDA-approved therapies, underscoring the platform's continued strength and strategic importance.

    04

    Prescription Technology Solutions Momentum

    McKesson's Prescription Technology Solutions segment demonstrated strong performance, with revenues increasing 14% and operating profit up 22%. This growth was fueled by increased prescription transaction volumes and robust demand for access and affordability solutions, including prior authorization services for GLP-1 medications. The company continues to invest in enhancing its core technical infrastructure and user experience to support future growth and customer needs.

    05

    Medical-Surgical Headwinds and Cost Optimization

    The Medical-Surgical segment experienced lower-than-anticipated volumes due to a softer illness season, with illness severity at approximately 62% of the average of the previous five non-COVID seasons. This, coupled with general market weakness🌐 in primary care, negatively impacted segment revenue. However, McKesson is on track to complete business rationalization initiatives by H1 FY26, expecting to deliver $100 million in cost savings in the second half of FY25, with a higher proportion in Q4.

    06

    Capital Allocation and Divestitures

    McKesson maintains a disciplined capital deployment strategy, focusing on stable free cash flow, strategic acquisitions like PRISM Vision, and returning capital to shareholders through dividends and share repurchases. The company completed the divestiture of its Canada-based Rexall and Well.ca businesses in December 2024, allowing for prioritized investments in other strategic areas. McKesson also reiterated its commitment to fully exit its European business, with Norway being the remaining operating country.

    AI-generated summary of the company’s earnings call. Not investment advice.