McKesson Earnings Call Insights: Med-Surg Business and Branded Price Inflation

McKesson, Inc. (NYSE:MCK) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Med-Surg Business

Lisa Gill – JPMorgan: I had a question John, on the med-surg business. Clearly 15% is really strong. Jeff talked about the extra day and the acquisitions being 4%, but 11% growth. Can you talk about where that’s coming from and how you see that business evolving. Was part of this flu and therefore more one-time-ish or are you seeing a pickup in the overall business?

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John H. Hammergren – Chairman, President and CEO: I think we’re seeing a pickup in the overall business Lisa. I think we’re doing a better job of penetrating our existing customer base from a sales perspective selling more of what they need to run their practices and clearly in the alternate site markets, we’re growing rapidly in home care and extended care. I also would say that I think we are gaining some additional new customers as we progress with our value proposition in our offering. We’re making our sales force more efficient through the productivity tools we’re giving them. So, they have more time to spend with the customers and we’re providing tools to our customers frankly so they can order more efficiently from us. I would also say that the flu impact as we began to see it was more late in December. We might see some of it in our fourth quarter. Clearly the January and February effects, we’ll see – it won’t really be that material on med-surg, but it’s an important part of our business and clearly we are seeing an uptake in physician office visits and emergency room visits et cetera in our industry, but I think overall, it’s just kind of solid momentum across the board and almost all of the businesses that comprise Med-Surg and continued traction with the value proposition that we’ve given to our customers.

Lisa Gill – JPMorgan: And then just as a follow up, Jeff, thank you so much for all the detail, this is very helpful. But when we think about the technology in the deferred revenue the 16 million and the 30 million, can you give us an idea of when that will ultimately be recognized?

Jeffrey C. Campbell – EVP and CFO: The reality as we sit here today, Lisa, is we have situation where we have got a lot of bookings, a lot of implementations, a lot of customers who like the products but a structure where that revenue is liable to be sitting on our balance sheet for an extended period of time. So, I can’t give you a solid endpoint sitting here today. I would tell you that as we think about our FY ’14 plans that revenue is unlikely to reverse in FY ’14 event. And so the magnitude of the challenge I just described in ’13 is liable to be somewhat replicated in FY’14.

John H. Hammergren – Chairman, President and CEO: I would also just add to Jeff’s comments. I think we are excited about the progress the team is making getting customers on board with our value proposition but in the near-term with that revenue rec issue being out in front of us we actually probably are booking more expenses in the near term and it can’t be delayed and the revenue gets delayed as we get these implementations done and continue to build up the value of the product for our customers. So, it actually has a compounding effect. The success of the bookings raises expenses and the revenue gets delayed as we try to get it. Now, we are getting the cash though and so I think there is an indication that products are working and our customers are happy, it really is just an issue of making sure that we met the obligations and the requirements our customers have in front of us because we can actually book the revenue.

Lisa Gill – JPMorgan: Just to be very clear on the accounting, Lisa and John. So, all the expenses associated with these customers we just book ratably as we incur it. That’s why I made the comment earlier that when I described the revenue that’s being deferred. It’s really revenue that we’d have and when it hits the P&L will be almost 100% earnings.

Branded Price Inflation

Thomas Gallucci – Lazard Capital Markets: Thanks for the color guys. I guess just on the drug business or actually the Distribution business obviously Med-Surg did a little bit better. On the drug side, you mentioned maybe branded price inflation or benefits from branded price have gone up a little bit. Can you give some more understanding of what’s driving pretty big upside, I guess in the Distribution business overall versus what your expectations were?

John H. Hammergren – Chairman, President and CEO: I think that it’s really across the board, Tom. I think the Distribution guys are really performing very well. They’re focused in executing well across the board. As Jeff mentioned, we do see continued strength in our relationships with the branded manufacturers. Frankly, most of that strength will be realized in our fourth quarter as we’ve seen the progression of what’s transpired early in this calendar year. So, I think we are feeling good about what’s going on. Our Canadian business setting aside, the charge is performing well and I think our generic business has executed very well as well. So, I think that we’re in pretty good shape in that business and they’re executing well.

Thomas Gallucci – Lazard Capital Markets: I guess just as a follow-up, any color you can offer within the Specialty business, whether it be sort of the traditional side or The US Oncology side?

John H. Hammergren – Chairman, President and CEO: I think we’re actually having strength across the board also in Specialty. I think we’ve seen a nice ramp in customers who have either already joined or have indicated an interest in joining our US Oncology Network, which as you know, is the most intimate of the relationships we have with our customers in that space. Our value proposition there is quite expansive and as customers come under pressure, clearly US Oncology is an alternative that I think most folks are considering. One of the things we’re tracking a lot now is what benefit are customers realizing by being part of The US Oncology Network, and is that benefit improving year-on-year and quarter-on-quarter and I can tell you we’re tracking very nicely for our customers as it relates to their performance under these programs with us. So that that’s a real positive. I do think that the segment overall continues to be poised for good growth as we look forward.

A Closer Look: McKesson Earnings Cheat Sheet>>