Key questions and answers from the first quarter fiscal 2009 earnings call conducted by McKesson Corporation on July 23, 2008.
Bret Jones (Leerink Swann): Could you update us on the Horizon enterprise management?
John H. Hammergren: Horizon enterprise resource management was just recently launched.
We believe the product is well suited for both existing McKesson customers upgrading to a more contemporary platform as well as competitive customers who might be running other systems to use this new product.
The idea behind it really is that it will integrate much more effectively with the new clinical systems that we''ve sold and perhaps which others have sold. We''re excited about the launch; we are making progress and signing new deals with our customers.
Bret Jones (Leerink Swann): What is your comment on the gross margin within the technologies solutions business?
Jeffrey C. Campbell: The gross margin bounces up and down a little bit but the $21 million is the biggest chunk. The other thing is that we did have a spike in physician office software sales last year. This was in light of the regulatory deadline and that stuff is almost pure margin. As that spike last year was not replicated this year that drove most of the rest of the decline in the gross margin.
John H. Hammergren: It is also important as we''ve talked about this business in this past as to look at our full year expectations on the business because we do see lumpiness in the business quarter-to-quarter depending on when contracts are signed and more importantly when they are implemented and how the revenue is recognized.
We do things in a very conservative way and sometimes you''ll get these artifacts of things flowing through that business in different ways quarter-to-quarter. However, we''re still very optimistic that we''ll make good progress towards our goal of low to mid-teens margins for that business for the full year.
Bret Jones (Leerink Swann): However, relative to your other three quarters, there is nothing different in the mix of the business. Could that explain why it was lower than the other three quarters last year?
Jeffrey C. Campbell: I do not think there are significant differences in the mix. You''ll see that there were more hardware sales in the quarter that grew faster than the other segments and hardware sales have the worst margin of the three so that''s possibly is part of the mix. However, business is big and complex. It has lots of different moving parts in it. Software is the most profitable and soft wares are off a little bit compared to the others as you get a little bit of effect. On a full-year basis, we are feeling very good about that business in the pipeline and tunnels we see in front of us.
Robert Willoughby (Banc of America): It looks like $242 million of deal spending year-to-date. Can you provide detail on what you did on the Canadian acquisition plus the IT deals that have closed since the quarter?
Jeffrey C. Campbell: In terms of acquisition spend, I''d also point out that there''s other line, which has to do mostly with the pharma-soft deal which actually technically closed July 1, but the cash was sitting in an escrow account. This is why it is down in the other category. In so far as McQueary goes, we have been very public about the number; that''s a $190 million and a couple of other technology deals which drove the remainder of the $242 million.
David Veal (Morgan Stanley): Can you give us an update on the AWP litigation?
John H. Hammergren: We typically do not talk a lot about progress in litigation until there''s something really to discuss and we don''t take reserves for litigation unless we have a known certain amount and that would typically require an agreement between various parties. I can''t speak to whether this will settle or it won''t settle. I can say the only news in this case is that the court has set a December 1st start date for the trial of the claims by the two certified classes in the Boston AWP litigation case.
Litigation is inherently unpredictable and all I can do is reiterate what we said from the very beginning of this case and that is we believe it lacks merit and that our company has all times acted properly and legally. We intend to continue to defend ourselves vigorously.
Thomas Gallucci (Merrill Lynch): Pharma growth was very strong versus our expectations. Could you define how you are driving such strong numbers especially relative to some of the market information and do you think you are taking any share?
John H. Hammergren: We are very pleased with our growth in the pharmaceutical distribution business. However, as you have seen in our result, we have been growing our direct-store delivery business.
We are really pleased about how we are positioned in that business and we do think we''re taking share of our existing customers spend that goes outside of wholesaling. We also think that some of our customers are growing slightly faster than the marketplace and the overall market statistics that are published by IMS and others have typically been directionally correct but not absolutely correct.
Wholesalers as a group have typically grown faster than the IMS. We are pleased with our growth, we think our growth is going to remain very solid and we''re getting great leverage on that growth by growing gross margins even faster than we growing revenues and it''s the best result in the margin expansion in our business which is one of our top priorities.
Thomas Gallucci (Merrill Lynch): What are your thoughts about Rite-Aid as far as credit being a bigger customer and the time that it has been going through?
John H. Hammergren: Rite-Aid has been a long-term customer of ours and a good customer of ours. We have a very open and frequent dialogue with them and so there''s really nothing new to discuss relative to the relationship with McKesson and we are pleased to have them as a customer.
Glen Santangelo (Credit Suisse): There has been some drug distribution operating margin expansion year-over-year and if you back out the anti-trust settlements in the prior year, the margin expansion was even better. What is driving that?
John H. Hammergren: It is really a combination of many factors. Generics continue to be a very important part of our business. I am not sure the big generic wave was in the first part of this year but it is really coming later in the year. I can''t point to any specific launch that helped drive our number. We continue to manage our expenses very carefully which helps give us margin lift.
We try to manage our mix in the business effectively as you pointed out selling more generics in to our existing customers and taking generics that they would have otherwise purchased direct or around us. We also are focused on making sure that we optimize our relationships with the branded manufacturers and when they have price increases we do get some benefits on that side as well. It''s all balanced on making sure our sales force doesn''t give it away on the customer pricing side and they sell the total value of your relationship with the customer.
Our field teams have done a great job of demonstrating the value on a regular basis for our customers. Things like Health Mart and others produce more value for our customers than we ever charge in fees. A big part in maintaining margin growth is to resist the temptation to respond to the pressure by dropping pricing.
Larry Marsh (Lehman Brothers): Is the consolidation of generic companies good or bad for you?
John H. Hammergren: Mergers by our customers and by our suppliers have been a long-term trend. For as long as I have been in this industry, it certainly has existed. We typically work very well with the consolidators on both the customer side as well as on the manufacturing side.
We try to be aligned with winners and to the extent that those winners produce additional efficiencies, the entire industry is better off because waste is eliminated and there is an opportunity to turn that waste into margins for us in the industry. The issue of making sure we have a fair price and a fair deal is important and to the extent that we continue to use our buying strength and power, the natural thing in the industry will be continued searches for consolidations and efficiency.
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