麥卡遜 (MCK) 2011 Q3 法說會逐字稿

Good afternoon and welcome to the McKesson Corporation Quarterly Earnings Conference Call. All participants are in a listen-only mode at this time.(Operator Instructions)I'd now like to introduce Ms. Ana Schrank, Vice President of Investor Relations.

Thank you Peter. Good afternoon and welcome to the McKesson Fiscal 2011 Third Quarter Earnings Call. With me today are John Hammergren, McKesson's Chairman and CEO, and Jeff Campbell, our CFO. John will first provide a business update, and will then introduce Jeff, who will review the financial results for the quarter.After Jeff's comments, we will open the call for your questions.We plan to end the call promptly after one hour at 6.00 Eastern time.

Before we begin, I remind listeners that during the course of 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. In addition to the Company's Periodic Current and Annual Reports filed with the Securities and Exchange Commission, please refer to the text of our Press Release for a discussion of the risks associated with such forward-looking statements. Thanks, and here is John Hammergren.

Thanks Ana, and thanks everyone for joining us on our call. I'm pleased with the Company's third quarter and year to date operating results. This quarter we achieved total Company revenues of $28.2 billion, and fully diluted earnings per share from continuing operations of $1.12, excluding the $180 million(Sic-see press release) pre-tax AWP litigation charge.

Although we have not reached any final settlement remaining Public Entity AWP claims, we are making progress toward resolving these matters. Jeff will provide more details on the litigation charge in a moment. And all of my comments today will focus on results excluding this charge.

Our third quarter earnings included $0.10 of transaction expenses, related to our acquisition of US Oncology, which closed on December 30.Let me highlight the third quarter trends in both segments, starting with Distribution Solutions.We had very strong results in this segment, considering the exceptional increase in demand related to the H1N1 flu virus that we experienced last year. Our third quarter operating margin of 174 basis points is a result of outstanding performance in US Pharmaceutical, Canada, Specialty Care Solutions, and Medical Surgical.

Generics continued to play a significant role across our distribution businesses. In the third quarter, sales have of Generics through our proprietary program, OneStop, grew 29% due to the steady pace of launches and the high degree of compliance that our customers have with our value-added programs. We've also been pleased with the relative price stability within the Generics market and a steady stream of launches where we have been able to negotiate great savings for our customers. In addition, our global sourcing approach to buying generics maximizes efficiencies and optimizes the value we deliver to our customers, because we coordinate purchasing across the various businesses in geographies at McKesson. With a favorable Generics launch schedule and our comprehensive offering we anticipate continued profit growth in Generics.

Turning to US Pharmaceutical, this business consistently performs at a very high level and contributes nicely to margin expansion.In addition to the strong contribution from Generics, we continue to benefit from our long standing relationships with branded manufacturers, delivering great value to them and earning steady levels of compensation in return. We have an outstanding value proposition that continues to register with a our customers. We have a complete offering to help retailers and hospitals whether large or small, operate their pharmacies.For example, retailers can benefit from our Health Mart offering, with inventory management, branding and signage, business software, and claims adjudication.

We also offer Simple Fill services, filling the patients' prescriptions in a lower cost setting, right in our own distribution center.This offloads some of the labor expense from the pharmacy. In addition, we have a robust offering that can help hospital pharmacies lower their medication related expenditures and simplify their inventory reporting with our Fulfill-Rx Solutions. By taking a customer-centric approach to the needs of all pharmacies, we differentiate ourselves and earn long-standing relationships with our customers.

As you know, we report the revenue of our Specialty Care Solutions business in US Pharmaceutical. The big news for us in Specialty is our acquisition of US Oncology. We have been building our offering in Specialty, and in particular, for community oncologists for some time.We started off small over a decade ago and built the businesses internally, before we added to our base business with the 2007 acquisition of Oncology Therapeutics Network. OTN gave us significant scale and an industry-leading technology platform designed specifically for community oncology practices.

With our recent acquisition, the combined organizations of McKesson Specialty and USON now offers oncologists and other specialty providers one of the industry's broadest arrays of technology, pharmaceutical distribution, reimbursement services, research and clinical services, and back office support, as well as the continued flexibility to select the business relationship model that best meet their needs. Oncologists in particular, will have the option of choosing from wide range of products and services, beginning our world-class Specialty distribution. They can then add automated inventory management solutions as the need arises. The practice can also choose to be a Comprehensive Strategic Alliance customer, which provides technology, practice management services, and other resources designed to help community oncologists achieve long term success.

Community oncologists face business challenges, such as declining reimbursement, movement toward bundled payments and accountable care organizations, and the capital required to grow their practice. USON provides full range of clinical and back office services for doctors, so they can concentrate on delivering the best clinical care to their patients, while improving their financial performance. Not only do we provide a broad service offering to community oncologists, but we also expand our capabilities over time, and we can provide oncology-specific services and solutions to our hospital customers, advancing the development of their cancer care programs.

US Oncology supports 14 hospital partners in the expansion of their cancer care services. Our combined organizations will continue to explore strategies that extend value to hospital customers, who wish to form partnerships with community-based oncology practices. With the combination of USON's physician-driven evidenced-based Medicine program and McKesson's leadership and distribution and hospital automation technology, we have an unbeatable set of assets to help hospitals succeed.

We believe that our Specialty business in USON's are complementary. Oncology is a high growth part of the Healthcare industry, and the area with the most pharmaceutical innovation. USON will be added to both our operating margin and earnings growth rate in our Distribution Solutions segment.We are extremely excited and optimistic about the future growth of this business.

I will briefly touch on our other Distribution businesses. Medical and Surgical revenues were down 2% in the third quarter, but this was due to the challenging comparison to last year's third quarter, which benefited significantly from the increased demand related to the H1N1 flu virus. We remain focused on delivering value to our Medical Surgical customers by optimizing our sourcing of the McKesson brand, and we continue to drive leverage through aggressive cross management. Combined, these initiatives are resulting in margin expansion.

Our Canadian Distribution business had solid performance in the third quarter. Revenues have been impacted by price reductions on generic drugs, driven by changes in public policy in certain provinces during the year, and the launch of the generic version of Lipitor, which happened earlier this year. But the team has done an outstanding job of offsetting these challenges.It is still our expectation that we will work through the public policy changes in Canada, with only a modest financial impact that we can manage for this fiscal year. We are still evaluating the longer term impact of the changes and our response to them.

In summary, the third quarter results in Distribution Solutions were outstanding, and I'm proud of the team's ability to continue to deliver value to our customers. We have a terrific combination of assets and have great confidence in our full year performance.

Turning now to Technology Solutions. Over time we have built a large and differentiated technology business, with offerings for hospitals, payors, pharmacies, and physicians. We have an intimate understanding of the market, and a unique perspective on both the challenges and opportunities.Our Technology segment is designed to meet the needs of our customer base using all of our assets, whether those assets reside in Provider Technologies, our RelayHealth business, our Payor business, our Ambulatory businesses, or even within our Distribution business.

As a result of stimulus, much the industry focus and our internal focus in our Provider Technology and Ambulatory businesses has been on clinical solutions to position our hospital and physician customers to qualify for incentive payments to under ARA. This year, our teams have worked diligently to deliver the Clinical Solutions our customers need to enable them to demonstrate meaningful use, and we are pleased that our clinical systems are receiving certification. We are committed to partnering with our customers to ensure Clinical Solutions meet their needs.

Customer installations of Clinical Solutions are progressing, and given the implementation schedule we've worked out with our customers, we still expect our fourth quarter to be our strongest. What's great about our business is our broad portfolio of technology offerings puts us in a unique position. The integration of clinical and financial information has become increasingly important to our customers, who must demonstrate high quality clinical care while managing the costs associated with that care.

We are market a leader in establishing connectivity in healthcare. We have one of the largest connectivity businesses in the industry, with a significant footprint that allow us to move financial transactions across complex networks to help manage the information that is processed. Increasingly, customers are looking for us to connect them from a clinical perspective as well. We believe this is not only one of the fastest growing businesses inside McKesson, but will remain a very interesting and fast growing business for us in decade ahead. The team in our Technology Solutions segment is focused on developing and implementing the solutions that our customers need in this age of healthcare reform, and we remain confident in our future prospects.

Before I turn the call over to Jeff, I want to mention that even after closing the USON transaction, our balance sheet and cash flow strength continue to provide us with flexibility to deploy capital. You should feel confident that we intend to use our balance sheet and cash flow wisely and strategically. I believe we are well positioned for continued success, based on the operational momentum in our Distribution Solutions segment, we are raising our fiscal 2011 guidance range, which is now $4.82, to $5.02 per diluted share from continuing operations, excluding the adjustments to the litigation reserves and the full year US Oncology transaction expenses of approximately $0.15 per diluted share. With that, I'll turn the call over to Jeff, and we will return to address your questions when he finishes. Jeff?

Thanks John, and good afternoon everyone. McKesson posted solid operating results this quarter. Strong execution in our Distribution Solutions segment is driving our results.And with the acquisition of US Oncology, we successfully leveraged our balance sheet and healthy cash flow, positioning us to create shareholder value over the long term. Overall, we continue to expect a strong finish to the year.

Let me start by walking you through a couple of items that impacted our financial statements this quarter, starting with $189 million AWP litigation charge. This charge represents an increase to an existing litigation reserve for current and possible future public entity claims against McKesson, relating to drug reimbursement benchmarks known as average wholesale prices for AWPs.As a reminder, we initially established $143 million reserve for these public entity claims during the third quarter of fiscal 2009, when we settled the private payor AWP claims. Since then, we have continued to work through the remaining public entity claims.

The pace and progress of discussions involving state and federal Medicaid claims accelerated during and after the third quarter. As a result of these settlement discussions and our most recent review of these claims, the litigation reserve has been increased by a pre-tax charge of $189 million. This $189 million charge has been recorded in the Distribution Solutions segment. It equates to $0.52 per diluted share. So when you look at the bottom of Schedule One in our Earnings Release, you will see our third quarter EPS from continuing operations, excluding adjustments to the litigation reserves, is $1.12. My discussion today will focus on this number.

It is important to note however, that this $1.12 EPS includes approximately $0.10 of transaction expenses related to the US Oncology acquisition. As one other point of clarification about the quarter, the balance sheet of US Oncology is included in McKesson's balance sheet as of December 31, 2010.Given the December 30th close date for the transaction, however, the operating results of US Oncology will not be included in our Distribution Solutions segment until the March quarter of the current fiscal year.

Let me now talk about our consolidated results. Total revenues and gross profit were flat for the quarter compared to last year.Market growth across our businesses was offset by lower warehouse purchases by two of our US Pharma customers.We also are now lapping the incremental revenues and higher-than-average gross profits generated by last year's incremental flu demand related to the H1N1 flu virus. As reminder, the overall impact of the demand related to the H1N1 flu virus was approximately $0.25 per diluted share from last year's third quarter.

Total operating expenses for the quarter increased 2% to $965 million. This line includes $24 million in transaction expenses related to the US Oncology acquisition. Excluding these costs our operating expenses were roughly flat year-over-year. We have been saying that we expected year-over-year operating expense growth to moderate in the back half of the year as it now has, and we expect this to continue in the March quarter.

Other income was $7 million, compared to $25 million in the prior year.The prior year benefited from the sale of our equity interest in McKesson Logistic Solutions in Canada, which resulted in a pre-tax gain of $17 million or approximately $0.05 per diluted share. Interest expense this quarter includes $10 million related to the bridge financing we put in place for the US Oncology acquisition. Excluding this $10 million, interest expense declined 9% year-over-year to $43 million, primarily due to the repayment of $215 million of long term debt in March 2010.

Moving now to taxes, excluding the impact of the litigation charge, and similar to last quarter, we experienced a change in our expected foreign domestic income mix for the year. As result, our estimate for the full year tax run rate has been raised to 34%. Net income for the quarter was $288 million, and our diluted earnings per share from continued operations, excluding the AWP litigation charge, was $1.12, which, as I mentioned, includes approximately $0.10 of transaction expenses related to the USON acquisition.To wrap up our consolidated results, our diluted weighted average shares outstanding were 258 million for the quarter. We continue to expect our full year average share count to come in a bit below the original guidance we provided, 267 million shares outstanding.

Let's now move on to a discussion of our two segments.In Distribution Solutions, revenue growth overall was flat compared to the same quarter last year. Total US Pharmaceutical Distribution and Services revenues declined 1% versus the prior year. I will point out that this quarter was unfavorably impacted from having one fewer sales day this year.

Direct revenues were up 2% for the quarter. When you exclude the impact of the incremental flu demand in the prior year, our Direct Distribution revenues grew by 3% to 4%. Our Warehouse revenues experienced an 11% decline year-over-year, primarily due to the lower purchases from two of our large retail chain customers. I would also remind you that brand to generic conversions particularly impact Warehouse revenues. As we discussed during our last earnings call however, the impact on our earnings of lower Warehouse revenues is more modest, as we earn lower margins on our Warehouse revenues relative to the margins on our Direct revenues.

Canadian revenues on a constant currency basis grew 2% for the quarter.Including a favorable currency impact, revenues increased 6% versus the prior year.While market growth rates were above 2%, government imposed price reductions on Generics, combined with the launch of generic Lipitor in Canada, continued to impact our Canadian revenue growth.

Medical Surgical revenues declined 2% for the quarter to $744 million, driven by the decrease in demand from the H1N1 flu virus. Excluding the incremental flu demand in the prior year, Medical Surgical revenues grew 4% to 5% compared to last year.Gross profit for the segment declined 2%, to $1.1 billion, with gross margin down seven basis points.

Here again, you see the impact of the prior year's incremental flu benefit, as most of the $0.25 of H1N1 related profits last year flowed through the Distribution Solutions segment. So in fact, it is a very healthy performance to be only down seven basis points against this comp. This was driven by strong growth in our Generics profits, along with the volume and timing of when we received compensation under our agreements with branded pharmaceutical manufacturers. Overall, year to date price increases through December 31 have been in line with to a bit better than our original expectations.

Our Distribution Solutions operating expenses increased 7% to $608 million, which includes the approximately $24 million of transaction expenses related to the acquisition of US Oncology. Excluding these transactions costs, our operating expenses were up approximately 3%, with the year-over-year growth moderating sequentially as we expected, and as you saw in the Company's total operating expenses.

Operating margin for the quarter was 174 basis points, and year to date, we are now at 185 basis points versus 176 basis points in the prior year. We are encouraged by year to date operating margin, and as a result, now expect our full year operating margin to be up versus last year's GAAP margin rate of 188 basis points. This is a remarkable performance given the earnings last year from H1N1 demand, which flowed through the Distribution Solutions segment at a higher-than-average margin. In summary, we are extremely pleased with the strong year to date performance and margin expansion of our businesses within Distribution Solutions.

In Technology Solutions, total revenues increased 2%, to $790 million for the quarter. Service revenues were up 3% in the quarter, reflecting the more stable nature of these revenues.This quarter we recognized approximately $23 million of previously deferred revenue related to a Disease Management contract with CMS, which roughly offset the impact of the sale of our McKesson Asia-Pacific business in the second quarter of this fiscal year.As reminder, this Asia-Pacific business generated approximately $18 million in revenue in last year's third quarter, and we will continue to see the McKesson Asia-Pacific revenue's impact our year-over-year comparisons through the first quarter of 2012.

Software and Software Systems revenues of $135 million declined 2% from the prior year. Hardware revenues of $26 million in the quarter were up 13% from the prior year. Technology Solutions gross profit was up 8% versus the prior year to $379 million, driven primarily by the recognition of the $23 million in deferred revenues, which had related expenses that were recognized in previous years.

Operating expense increased 1% in the quarter, to $273 million. Our continued cost containment efforts across the segment have allowed us to maintain our investments in R&D, while keeping expense growth low. Our total gross R&D spending was $108 million, compared to $103 million in the prior year. Of this amount, we capitalized 10% versus 13% a year ago.

Technology Solutions operating profit increased 31% versus a year ago to $106 million. Our operating margin in the segment was 13.42% for the quarter, compared to 10.51% in the prior year.For the full year, our assumption of modest operating margin improvement, excluding the second quarter asset impairment, remains unchanged. Now if you do the math on this assumption, you will see it assumes an unusually strong March quarter. This remains our expectation, based on the implementation schedules we have worked out with our customers, along with various products certifications and GAs, which are scheduled to conclude in the fourth quarter.

Leaving our segment performance and turning now to the balance sheet, let me remind you that our financial statements include US Oncology's balance sheet, but not their income statement for the quarter. As a result, it is more relevant to discuss today our working capital metrics, excluding US Oncology.Our receivables were $8.6 billion, a 4% increase over the prior year, driven primary by the addition of USON's receivables. Excluding these USON receivables, our days sales outstanding decreased to 23 days from 24 days last year. Compared to year ago, inventories were up 8% to $9.5 billion, and payables were up 4% to $13.6 billion. So our days sales in inventory of 32 days was up two days from a year ago, while our days sales in payables increased one day from a year ago to 45 days.

These working capital metrics have resulted in $1.3 billion in operating cash flow year-to-date. Given that we had another good quarter of cash generation, we are feeling more positive for the year, and we now expect it to be in the higher end of a range of $1.5 billion to $2 billion in cash flow from operations for the full year.

This healthy cash flow generation led to a cash balance of $3.2 billion at December 31, and with the assumption of the outstanding US Oncology debt, which we plan to refinance, our balance sheet is now in the middle of our target range of having a gross debt to capital ratio 30% to 40%. All of this positions us well for continued capital deployment. Capitalized spending was $268 million for the first nine months, in line with the $271 million we spent in the prior year. Our annual guidance for capital and software expenditures in the range to $400 million to $450 million remains unchanged.

Now I will turn to our outlook. As John mentioned earlier, we are raising our guidance on diluted EPS from continuing operations, excluding adjustments to the litigation reserves, from $4.72 to $4.92 to a new range of $4.82 to $5.02. This new guidance range excludes transaction expenses related to the acquisition of US Oncology, which we expect will approximate $0.15 for the year, including the $0.10 we incurred in the December quarter.

You heard me last quarter talk about seeing a pathway to achieving our original guidance range. Since then, that path has become much clearer. Our Distribution Solutions segment delivered strong third quarter results beyond our prior forecast, and overall for the year is performing at a very high level. This strength in Distribution Solutions has given us confidence in our ability to achieve our new higher guidance range, despite the increase in our full year tax run rate assumption from 33% to 34%. Obviously, to achieve this guidance, we expect the fourth quarter to be unusually strong in both segments. One last point about our fiscal 2011 outlook, we continue to expect US Oncology to have a neutral impact to earnings this fiscal year, excluding the approximate $0.15 of transaction expenses.

In summary, we are pleased with our third quarter financial results and believe our year-to-date performance positions us well for a strong finish to fiscal 2011. Thanks, and with that, I will turn the call over to the Operator for your questions. [Just for time], I would ask that you limit your questions to just one per person to allow others an opportunity to participate. Operator?

Thank you.(Operator Instructions)And, our first question will come from Larry Marsh, Barclays Capital.

Thanks, John and Jeff, and congratulations on solid results. I wanted to get your comments, John, on the statement you made about seeing relative pricing stability in your generic marketplace. I know you've called that out in the past, but how do we put that in context? You guys have a great buying program under a Saul Factor, but yet this has to do with individual prices. Is this somewhat of an anomaly, or do we think that this is signaling a more significant trend, as you think about the big generic opportunity in 2011 and 2012?

That's good question Larry. I think the comment really refers to the behavior of pharmaceutical manufacturers, not the wholesalers, just to be clear, and it's the inbound price we are experiencing from the manufacturers or that we are seeing as market level pricing. And, one of the concerns that investors have expressed in the past is the deflationary effect that generics have, not only on our pre-branded revenues, but, once they become generic, there is always concern about it deflating further or coming out at such a low level, there's not enough gross profit dollars in the sale price to property fund the system, so to speak.

And, I guess my comment was really meant to say that we are seeing less de-inflation in Generics and in fact are seeing more inflation on some of the Generics that have been in market for a while, and as long as McKesson is able to get a very good buy for our customers that pricing stability actually bodes well for us, because it provides for enough margin in the marketplace for us to be properly paid for the services we provide.

Just a clarification then on your buying opportunities, how quickly are you going to be able leverage some of your buying into the Specialty Oncology marketplace now that US Oncology is completed, and would that fall under Saul Factor's team, as well?

I think we're already beginning to see some opportunities from our coming together with US Oncology. Our teams have gotten off to a great start. Our organization has been locked in place, and in fact it was basically announced the day that we closed, and we have got all of this under our Global Sourcing business, and Saul runs our Global Sourcing activities.So, this is a combined operation, and as I mentioned in my prepared remarks, we really look at Generics on a Company-wide basis, and frankly, we look at brands also on a Company-wide basis, and, as you might guess, we purchased a lot of branded product for the Specialty market both on the hospital as well as community side, but we also purchased a lot of generic products. So, we try to take a holistic approach, and US Oncology is already a part of that holistic approach.

Okay, I'll stop there.Thanks.

Thank you.

Let's move on to JPMorgan, Lisa Gill.

Thanks very much. John, when we look at your Healthcare IT business, you recognized $23 million in deferred revenue in the quarter, but it looks like you still have north of $1.3 billion on the balance sheet. Can you talk to us around some of the metrics that you have to meet in order to be able to start recognizing that revenue, and when you expect we'll start to see that?

Well, Jeff can jump in here, but just in terms of our revenue recognition, a lot of our revenue is dependent or our ability to successfully implement our customers on our product lines, and we follow a very stringent and significant process called Percentage of Completion Accounting. And, for a lot of that revenue, we are focused on recognizing it as we get our customers successful. There's also a significant portion of revenue obviously that comes in through maintenance on a regular basis, and we do have service revenues.So, they're all important to us, but we do have bookings that we have in a backlog.I'm not really sure that they appear on a balance sheet per se, but I'll have Jeff talk about that.

Yes, two things, Lisa. When you look at that $1.3 billion that's on the balance sheet, I think it's important to realize that the majority of that number actually just represents the timing difference between when customers give us the cash on annual maintenance contracts and when we recognize it over the course of the year. So, there's a minority portion of that $1.3 billion that is really the kind of revenues hung up on the balance sheet that you're talking about, where we have, in many cases, a product that is either fully installed or close to installed, but the [rev-rec] is hung up for any one of a number of reasons, getting to the final end of the completed contract on all the products with the customer.In some cases, right now, we have products that depend on certifications that we still expect to come in the next couple months, and in some cases, we have revenues [rec] that's dependent upon when products become generally available. And, in fact, that's why, in my prepared remarks, I pointed out that our strong fourth quarter does depend on a number of things in all of those three areas, following on to our [existing] schedule.

So, when we think about margins, Jeff, longer term, clearly the margins were solid this quarter. You had $23 million that you recognized. Should we think about that you will have a chunk that will be recognized where there is not necessarily cost to go with it in the fourth quarter? And, how should we be thinking longer term around the IT business and how the margin structure looks?

So, for the full year, Lisa, we still expect some modest operating expansion over our full year margin for last year, which, when you look at it, means you'll probably see a margin for the full year a little below 13%, which will mean a very strong margin in the March quarter for the reasons you cited, a fair amount of revenue dropping to the bottom line without a lot of cost.When you think about the future, you should expect to see us make modest progress on expanding the margin in that segment on a full-year basis. The one thing I think John and I caution people on is don't take the March quarter margin and annualize it, because it would be unusually strong.

Okay, great. One follow up on the lower warehouse purchases. Is that because of the dynamic that you talked about in shifting product from branded to generic, or is it that some of your customer relationships on the warehouse side have changed?

I think it's probably a combination of both, Lisa. Clearly, we have been working with our customers to provide the best possible service to them, and some customers choose then to not really be involved in the logistics any longer of their products, which means that our warehousing activity is more direct to store, as opposed to our warehouse to their warehouse. And, that elimination of that extra step saves them money and provides better productivity.

And, then, clearly, the other factor that Jeff mentioned is the movement of product to Generic just has a negative effect on revenues, and sometimes they'll source those generics, especially the biggest customers, they'll source those generics directly into their warehouse as opposed to running it through a McKesson operation. So, I think it's really a three-fold phenomenon.We're serving more customers directly to the store, Generics depressed revenues overall, even though they help us with profitability, and then this idea of the mix changing when they move direct on Generics.

Let's take our next question. Let's go to Steven with UBS.

Hi, thanks.As far as the transaction expenses, I just want to confirm that was about $40 million pre-tax based on my math, and was that all in the operating expenses line?

Yes, to be very clear. I probably should have been clearer. There's $24 million that appears in the operating expense line, and that's professional fees and a settlement we had with CCE just prior to closing the transaction, and there's $10 million that appears down in the interest expense line, and those are the fees associated with our bridge financing, just due to the tax attributes of those items, that $34 million of pre-tax cost translates to $0.10 after tax.

Okay. Just quickly on the Canadian operations, any update on the IPC situation?

Well, the IPC operation is actually a US based customer, and we have obviously a long term, very solid relationship with IPC. And, although we are disappointed with the place we are today relative with the litigation that we are discussing with them, we are continuing to service the business, and we're hoping to get to a positive resolution.

In Canada, our discussion has been primarily on two subjects, and that is the subject of the Generic policy changes, which I covered in my earlier discussion.And, we have a large customer up there called the [Kates] Group, that, on occasion, we get asked a question about that relationship. And similar to IPC, we have a contract that's in place, and we're continuing to work with them to make sure that we continue to meet their needs and deserve the valued spot that we have in their business practices.

Yes, sorry, I had my notes running together. The [Kates] Group is the other one I was going to ask about.Okay, thanks.

Let's go to with Ross Muken with Deutsche Bank.

Hi, Jeff, I just wanted one quick clarification in terms of the bridge loan and then in turn what we're doing with the cash in terms of the existing US Oncology debt. So, on a go forward basis, should we assume that the bridge gets paid down and we're kind of back by the beginning of next year, kind of back at the normalized run rate of interest?What are the moving parts on a go forward basis?

That's a good question. To simplify all the ins and outs, the way I would think about it is if you take the $10 million out of the December quarter, take that number and then add the interest on, let's say, roughly $1.7 billion or $1.8 billion of new debt that we will take out some time this quarter in all likelihood, at our kind of financing rate, and that will be the incremental interest expense I would annualize. The bridge, other than the one time cost, should more or less wash up.

Okay, and in terms of now that we've obviously been thoroughly active, both via M&A and earlier in the year on a share repurchase perspective, now that we're kind of through quite a period of activity, we didn't obviously given all that we didn't do much in buyback in the quarter, what's the go forward thought in terms of the share repurchase and kind of your intent to be active in the remainder of the year?

Well, clearly, I think we have tremendous flexibility with our balance sheet, and, as Jeff mentioned, we actually believe that our cash flow this year will be stronger than we originally anticipated when we started the year. And, those are both very positive things for investors, and we plan to continue to use our balance sheet to grow our business and to properly deliver returns for our shareholders. Clearly, share repurchase is always a safe bet for us, and it's something that needs to be compared in every case to any acquisitions that are brought forward to us.

The most important thing as we look forward is we continue to execute, and we have to execute with Generics, we have to execute with the branded manufacturers, we have to get the US Oncology acquisition integration work continued on its right path. And, clearly, we have opportunities to improve the performance of our Technology business to the way we implement our products and develop our products. And, so, all of those work streams are underway, and we will not distract those with any certainly acquisitions that we might consider. On the other hand, we're not out of the acquisition business, and we'll look at it as they arise.

Great. Thank you very much, guys.

You're welcome.

And, at Sanford Bernstein, let's go to Helene Wolk.

Thank you.I'll start with a question on the HIT business, and just curious how you think about what's going on in D.C. around perhaps revisiting some of the investment case, and questioning whether that's making any inroads or impact on new investment decisions by providers.

That's an interesting question, Helene. Clearly, we just had this across the wire discussion from a Florida judge that talked about healthcare reform in its entirety. Frankly, we haven't heard a lot of discussion around the retraction of the stimulus money related to ARRA, so I think we have to separate in our minds the ARRA stimulus money versus healthcare reform. The ARRA stimulus money has significant benefit to our providers to complete their implementations and get to meaningful use and get that reimbursement. It also has a stick associated with that carrot, and, that is, if they don't get there, their reimbursements will go down.

In talking with members on both sides of the aisle, I think everyone believes Healthcare technology is an important part of our go-forward plan, regardless of what shape reform actually takes. So, I have my own personal doubts about them coming back to the issue of paying for the ARRA stimulus money. To the extent that, that does become a discussion or debate, I don't think it would have much of an effect on the spending in this area, as most of it is already in flight, and a lot of this work was underway. And, frankly, most of our customers believed clinical investments were very important for both the issue of patient care and quality, but also the issue of cost.

So, I think they believed before and believe today that it's in their own best interest to implement this technology. What the stimulus did was provide inertia and a deadline around getting going with it, and many of our customers had plans that might extend five or ten years to get to where they need to get to in the next couple years. So, that those plans have been accelerated, and I can't imagine that they've put themselves back on a ten-year plan across the board. So, there might be some risks, Helene, that they would do that, but I don't think that's something we see right in front of us.

Great, and then just a second question on US Oncology. I know there were at least questions we received on the third quarter performance.Can you give us any sense in terms of what the fourth quarter performance was, whether it met your expectations or some semblance of understanding?

Well, Helene, a couple of comments. As you recall, when we announced this, we made the point that this would be additive to both our growth rate and margin rate. Over time, we expected it to be neutral to our results in the March quarter and then an accretive a beginning with our fiscal 2012. Their December quarter results, which you point out, aren't available publicly, are consistent with all the assumptions we made going into the transaction and consistent with all of the guidance we've given you for the future.

Okay, thank you.

And, Robert Willoughby with Banc of America Merrill Lynch.

Just a question. I just saw the CDC update, their forecast for diabetes patients. Do you guys pay attention to that data, and is it anticipated in your numbers or is it just consistent with the trend?

I think that diabetes clearly is a very important issue for our country. As it relates to our business, there clearly are pharmaceutical and medical issues related to diabetes, and probably the closest thing to us is in disease management, where our programs have proven the ability to reduce the impact and the severity of diabetes and help prevent the disease or certainly control it once people have been diagnosed with it.So, I clearly think there are some discussions and dialogues going on in DM that can be helpful.Med-Surge, we have test strips and all kinds of other things that we sell for diabetes, and, clearly, drugs on the Pharmaceutical side, but they're probably not that material to our business, certainly not yet.I think the places where we get the biggest pop from diabetes will be in Disease Management when we get those kinds of contracts.

And, the data itself, how do you view the CDC data, quality-wise? Is that consistent with your expectations, or do you discount that?

Well, I have to admit that I'm probably not a good critic of their data. We sort of take it at face value. I think that anecdotally, everything we see from many of the industry pundits and data sources would tell us that diabetes continues to be a high growth problem for our country. And, I guess on the positive side of that, high growth problems from healthcare perspective are usually opportunities for us.

Okay, thank you.

At Lazard Capital Markets, let's go to Tom Gallucci.

Thanks, good evening. We've sort of been hearing the same thing for the last couple of quarters, it's all been good news, but your strength on the Generic side, strength on the volume, I guess, as you put it this quarter, and the timing of branded manufacturer payments. What are the keys that have been better than what you expected beginning of the year in the Distribution side of the business?

Well, I think overall we're very pleased with the results, and, as usual, I think we do a pretty good job of planning the business. And, there are always things that disappoint and surprise us on the positive side, and our job is to try to balance those risks, as we forecast the year.So, I think the Distribution business has performed well, particularly from a cost management perspective and a Generic perspective, and I would say on those two frontiers in particular, I think I'm really pleased with the results.

We had some early price increases, and, as we see what happens here in the fourth quarter, the branded price increases probably are also beneficial to us. Overall, all of our businesses are executing, and for Specialty and Medical and Canada to overcome some of the challenges they've had are all quite significant in and amongst themselves.And, for all of them to be doing it simultaneously is also helpful.

And, I see you've sort of rolled over your guidance terms of the range, but $0.20, with one quarter to go.Can you just maybe highlight what the wild card might be if you're thinking about coming at the end of the quarter at the higher end versus the lower end?

Well, I'd really point, Tom, just to the usual things that we don't always have full control over. Exactly what happens in the next 60 days or so on Generic launches, exactly what happens on the next 60 days around branded price increases, which is more about timing of our compensation than total over the year. And, exactly how we do, I'd say, on the very complex and large number of implementations, certifications, and GAs that we have scheduled in Technology in the March quarter.

Thank you.

You're welcome.

Let's go to Robert Jones at Goldman Sachs.

Thanks for the question. Just a follow up on US Oncology. Now that you've closed the deal, obviously understanding it's still early, I was wondering if you could give us the initial broad reaction from the US On Oncologists? And, then, as a reminder maybe, could you just highlight what the key drivers of accretion are as we move into fiscal 2012 and beyond?

Thanks for the question. US Oncology doctors have had a great experience with US Oncology before the acquisition of McKesson, and they've been adding to their number of doctors in quite significant ways, so I guess the first thing I'd say coming into this, it's nice to have a customer base that's very satisfied in their relationship with US On, and the management team there knows the business exceptionally well, and they do a great job of delivering value on a myriad of dimensions, many of which I outlined in my prepared remarks.So, we have a happy customer coming in, and I think that they're pleased thus far with their knowledge of McKesson. We bring obviously a great deal of financial strength to the partnership with US On.We also, as we mentioned, have clearly a significant sourcing operation and understanding for IT and the implementation of IT, which they're all in the midst of trying to do in their practice.

So, on a myriad of dimensions, I think we have skills that can help them. They don't want to get lost in the size of our Company. They don't want to have relationships changed. And, I think first of all, they are not getting lost, and secondly the relationships they had before are the same relationships they have today. So, all in all, I've met with many of them, including the largest of them, and I think they are very optimistic about what this partnership and the coming together of our companies will mean to them.

And, on the drivers of synergies, I think they come in a lot of different ways as well, but I would tell you that because we, I think, bought this asset at the right price, we don't necessarily have to get tremendous synergies to make it a good investment for our investors. And, the synergies are largely, some cross synergies on the corporate side, but many of the synergies will come through the areas we just discussed. The IT side, the purchasing side, and then, clearly, we think the growth rate and the margin structure of this business are additive to our underlying Pharmaceutical Distribution business. So, on the dimensions that we care most about, growth rates and margin expansion, this business should help us.

No, that's helpful. I guess just thinking about US On obviously being something that could help drive margin expansion further, and then, in light of the continued margin expansion we've seen within the Distribution Solutions segment. Is there any update on the long term operating margin goal? I know there was some discussion around this last quarter.

We always hesitate to put the cart before the horse. We have not accomplished the end of our range that we gave you probably eight or ten years ago, so we're pleased to have made so much progress over that period of time, and we clearly understand that having a goal that you've already accomplished isn't much of a goal. So, we will look hard at that as we think about next year's guidance, and when we discuss it with you in May, we'll probably be prepared to provide some type of an update.

And, let's go to A.J. Rice with Susquehanna Financial Group.

Yes, thanks.Hello, everybody. On the Med-Surge business, up 4% to 5%, on an apples to apples basis excluding the H1N1 contribution last quarter, that seems like a fairly decent showing in this weak patient volume market. Can you comment on what might be behind that strength?

Thank you for the compliment, and we think of it as very solid performance as well in the Med-Surge business, and we are pleased with how that team is executing. We actually do believe in that business, where it's highly fragmented with many competitors, we're able to take some share, because we're able to deliver better value and a more complete offering for our customers.

You might also recall that the business sits in a bunch of different spots. We're not only very large in the Physician Office market, which has had some pressure from a visit perspective and even that business is performing well, we also have a large position in Long-Term Care and a very significant and growing business in Extended Care and Home Care. So, that platform of businesses is the right place to be, and I think that we are continuing to find synergies between the businesses and grow the margin rate as well as the revenue rate or above market levels.

Okay, just briefly, on thinking about the acquisition landscape, can you just comment on maybe deal activity behind the scenes? Are there a lot of things that might be of interest that are floating around out there right now in this environment? Maybe update us on any thoughts about areas of interest, as well as how quickly you might be back to the acquisition market, given the need to integrate US Oncology.

Well, the fortunate thing is that US Oncology resides in our Specialty business and the management team there is very skilled and adept, and, as I mentioned, there's not a great deal of integration to go on there. We are not closing thousands of facilities and firing thousands of people. We basically have a line of sight on what we're going to do and we're after it.

So, I don't think that our acquisition appetite is being diminished a result of US On, setting aside the comments made earlier about execution. Clearly, the deal activity ebbs and flows; we are [review of] most deals.Hopefully we review them early, and hopefully review them often, and when we don't do them it's because we've decided that we can't either make it fit financially or that it doesn't fit strategically. And, so, I think our job is to be on top of it. I would say the other positive comment on this is that we are in a lot of different businesses, so it give us a ability to have 360-degree view on acquisition opportunities, and, so, we will look at things that only IT companies would look at. We look at things that only Distribution would companies look at, and that puts us in a unique place, I think, to deploy our balance sheet.

Okay, thanks a lot.

Question now from Ricky Goldwasser of Morgan Stanley.

Thank you. So, a couple of [Inaudible] questions.First of all on the Distribution Solutions segment, I think last quarter you talked about improved generic compliance rate, with the Institutional Customer segment. So, did this trend continue in the December quarter, and also as we think about modeling future periods, is US Oncology going to be part of the Institutional customer segment, when you think about your customer mix, and does this mean that we should model further improvement in compliance rates for that particular segment?

Well, I will let Jeff think a little bit about where it fits in our segmentation. We talked about it being in US Pharmaceutical.The generic compliance opportunity for us, I think, continues in all of our businesses. Clearly, we're further ahead in some than we are in others, relative to the customer sets. What we've been talking about as industry in the last year or so has been our ability to partner with group purchasing organizations to meet their hospital Generic opportunities and requirements.

So, McKesson has benefited from going back to our hospital customers with a Generic portfolio that we previously would have not have marketed that we are now marketing today, and so I would say we're in the early phases of realizing the opportunity in the Hospital market from a Generic perspective. US Oncology, clearly the practices they own, buy, or will buy, exclusively from McKesson, like they bought exclusively from US Oncology, the practices that are managed, I should say, through the CSAs. So, I think that our ability to help them purchase Generics and to be quote, unquote compliant will obviously be very strong given their aligned interest with us. But, Ricky, I think we're making progress really across the board. Some of our customers that have been with us a long time and have been fully compliant a long time will benefit from new Generics more so than from just increased compliance.

Okay, and then one follow up on the operating margin. I think, Jeff, you said that the operating margin for the Distribution segment is going to be slightly above last year's level. So, are you also excluding US Oncology, the hit that you've seen in this quarter and what you are going to see in the fourth quarter from this calculation?Because when we exclude it, we get to an even higher margin expansion for the full year.

No, I'm really just comparing full GAAP to full GAAP, so, last year we were at 188 basis points for the full year in the Distribution Solutions segment, and what I said is we should be up. I don't think I said a little, I just said up, versus that number.

That's all in then.

Yes, it's all in; it's a very strong performance .

Okay, because when we include US Oncology, we get to about nine basis points of expansion.

You're saying if you eliminate the one time charges associated with the purchase price, so the one-time cost associated with the purchase price.Is that what you're saying, Ricky?

Yes, exactly.

I think what Jeff is saying is those numbers are in his.

Right, okay, so that's the source of the difference. Okay.

Operator, I think we have time for one more question.

Thank you.That'll come from Steve Halper at Stifel Nicolaus.

Yes, hi, so if you look at the GAAP tax rate in the quarter, it was around 40%. If you take out the AWP litigation expense, it goes to around 27%, and then you indicated that going forward, it would be 34%. So, could you just reconcile those three numbers for me?

Yes, Steve.This is a confusing point. Here is the way I would think about it. If you look at the Schedule One of the press tables, where we pull out the AWP charges and the related tax amount - -

The 189 and 56?

Correct.

Right.

So, if you make that adjustment, you will get to a rate for the quarter of about 36%, and that's the new 34% run rate, but because we booked the first two quarters at 33%, you have a catch-up adjustment, which, for the quarter, takes that rate from 34% to 36%. But, if you think about this from a modeling perspective, for the full four quarters, you should assume that we will have a 34% tax rate, if you apply it against the earnings, excluding the litigation charges.

So, when you say 34% that's for the entire year?

Exactly.

If you would have smoothed that out?

Exactly.

And, excluding the litigation charges.

Right.

Okay.

Great, thank you Steve. Well, I really want to thank all of you for your time and energy and attention today. I certainly want you to believe that we remain very excited about our unique offering across all of Healthcare, and obviously our ability to turn that into value for our customers and our shareholders.I'm now going to hand the call off to Ana to talk a little bit about our Wall Street activity for the next quarter or so.

Thanks, John. I have a preview of upcoming events.On February 8th, we will present at the UBS Global Healthcare Services Conference in New York. On February 21st, we will host a booth-side briefing at HEMS in Orlando.On March 1st, we will participate in the Oppenheimer Healthcare Information Technology One on One Conference in New York. And, we plan to release fourth quarter earnings results some time in early May. We look forward to seeing you at one of these upcoming events.Thanks, and good-bye.

That now concludes today's conference call. Thank you very much for your participation. Have a great day.