McKesson at Leerink Conference Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

We think global reach will bring value to our manufacturing partners

” we very much have the view that we’ll bring a strong value proposition to our manufacturing partners. Sometimes that’s around a manufacturer who wants to enter into a new geography that they haven’t necessarily been in before. But we have over a good long period of time now had a nice track record of really providing a lot of value to our upstream manufacturing partners as a result of our volume of purchases, as a result of the quality of our distribution network, the reliability of our distribution network. So, we think we bring a lot of capabilities to these new markets just as we have on traditional North American market.”

To be clear, the Rite Aid deal is purely commercial, nothing more

“Well, to be very clear, our relationship with Rite Aid is one where we do the buying of the generics for them. So, it is not a joint venture. There is no equity arrangement or anything of that nature, it’s just purely a commercial. We buy on their behalf, so thereby increasing our overall generic scale of buying. And that, along with various other attributes of product and service that we’re able to offer upstream to our manufacturing partners, allows us to get very keen pricing. And so, that’s been beneficial to us. And of course, it’s also beneficial to our downstream pharmacy customers, Rite Aid and all of the others included.”

We think we can help TGT and WMT with their generic buying

” we do have a number of current customers who do do their own generic buying today. And for a long period of time, we’ve been talking to these customers about the value that we think we can bring to them if we were to do the buying of the generics on their behalf. Obviously, it was good from our perspective to hear Rite Aid on their recent earnings call, talking about how they very much feel as we’ve delivered on the buying, generic buying savings that they were expecting that we’ve delivered on the $0.25 billion of working capital savings that they were expecting. And in fact, they’re delighted with the service levels that we’ve been able to now put into place [ph] that all of it does (10:22) with direct-to-door delivery five days a week. So, they’re obviously a nice advocate for some of these pillars of value that we think that we could bring to other customers.”

We’re taking a much different strategy than our competitors on sourcing

“Clearly, Cardinal and ABC have taken a very different stance, if you will, in essence, and we’re outsourcing that type of capability up to CVS for Cardinal, Walgreens for ABC. We’ve taken the stance that our sourcing capability is absolutely strategic to the future business direction of McKesson.

We see opportunities, particularly with Celesio, to further expand our worldwide reach of sourcing knowledge and capability. So, that’s the path that we’re heading down, whereas obviously Cardinal is paying $1 billion or potentially more to CVS over 10 years or so to be able to access the CVS price list. And then ABC is working as a participant in the joint venture owned by Walgreens and Alliance Boots. So, there is quite a distinction in the strategy that we’re taking in terms of generic sourcing versus our traditional competitors.”

Generic price inflation pretty narrow

“Well, we continue to see the price inflation being driven by supply shortages and of really a couple of flavors, either where the FDA is taking some action around enforcement; that is shutting down a line or a plant to particular manufacturer; or the other flavor really being where a manufacturer has for their own financial return reasons, their own resource allocation priorities, elected to do likewise, to shutdown a plant, maybe a line, maybe reduce capacity on a line, some flavor of that sort of activity that reduces the overall supply of a drug from that one source, providing opportunity to other sources to raise prices.

Now, it’s important I think to note that we continue to see this occurring on a really small minority of the generic pharmaceuticals with which we work.”

New blockbusters have a big impact on the top line but a more limited impact on gross profit

” while the drugs like SOVALDI and OLYSIO from J&J certainly have quite a significant impact to the top line. They have a much less of impact around the margins line. So, in fact, we updated our margin guidance for our Distribution segment, when we gave our Q1 result, saying that we think we can build Distribution segment margins a handful of points – basis points year-over-year. So, that’s a little bit less than what we articulated at the start of the year, in essence. And that’s very much driven by the lower-margin profile of this very high volume start to the year that SOVALDI and OLYSIO had.”