麥卡遜 (MCK) 2013 Q1 法說會逐字稿

Good afternoon and welcome to the McKesson Corporation quarterly earnings call. All participants are in a listen-only mode. (Operator Instructions) Today's call is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Erin Lampert.

Good afternoon and welcome to the McKesson fiscal 2013 first 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 PM 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 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.

Finally, please note that on today's call we will refer to certain non-GAAP financial measures in which we exclude from our GAAP financial results acquisition expenses and related adjustments, amortization of acquisition related intangible assets and certain litigation reserve adjustments. We believe these non-GAAP measures will provide useful information for investors. Please refer to our press release announcing first quarter fiscal 2013 results, available on our website, for a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thanks and here's John Hammergren.

Thanks everyone joining us on our call. Today we reported a good start to fiscal 2013 with total company revenues of $30.8 billion and adjusted earnings per diluted share of $1.55. We continue to expect to achieve our adjusted earnings guidance of $7.05 to $7.35 for fiscal 2013. Turning for a moment to the broader industry environment.

On June 28 the Supreme Court affirmed that their Affordable Care Act will proceed much as it was originally enacted by Congress. The act will drive many changes in healthcare in the coming years but through all of this change the issues of quality, access and cost will continue to remain at the center of all healthcare discussions. System changing reform is taking place throughout healthcare as payers, providers, manufacturers, pharmacies prepare for the expansion in coverage under the Affordable Care Act.

As patient volumes increase, our customers will need to respond with increased efficiency. Our customers will need toe continue to reduce costs and improve the quality of patient care through the use of information technology. They will be judged by adherence to evidence based protocols and approved outcomes, and they will be experimenting with new approaches to reimbursement models like patient centered medical home and accountable care. As a leader in healthcare services and information technology, McKesson has a great opportunity to help our customers meet these goals of reducing costs and promoting value across the healthcare system.

Before I turn to the first quarter results for distribution solutions, I'll provide an update on our average wholesale price litigation. As a reminder, McKesson had previously settled all private payer AWP claims during the third quarter of fiscal 2009. During the second quarter of fiscal 2012 we completed a settlement of local public entity claims. Most recently we finalized the settlement of the federal share of Medicaid claims related to AWP during the fourth quarter of fiscal 2012. Today we reached final agreement with the coalition of state attorneys general to resolve the majority of state Medicaid claims related to AWP. That leaves a few outstanding state cases that we plan to vigorously defend. This settlement represents another important step in bringing resolution to claims related to AWP.

Now let me turn back to our operations. Distribution solutions started the year with solid revenue and operating profit growth. Although it is still early in our fiscal year, we remain confident in our full year expectations. As I highlighted in our initial guidance on April 30, fiscal 2013 represents a robust year for all generic launches. McKesson is well positioned with our strong manufacturer relationships and customer focused proprietary programs to continue to provide value across our extensive generic offering. We also expect that our broad range of value added services for branded manufacturers should contribute to steady levels of compensation.

We continue to renew and expand our customer footprint in our distribution and wholesale business by delivering unique value to our customers. Like all customers, they are focussed on competitive prices and great service. However, in today's healthcare environment, that alone is not sufficient. Today our customers have to be more productive, deliver error-free and high quality care and increasingly connect to others involved in the financial and care processes, including the patient.

As you know, we have a large technology business that is only part of our value proposition as a company. Perhaps more important today is our ability to use technology in combination with the blocking and tackling of distribution to help all of our customers with their business, clinical and connectivity challenges. Sure, all of our markets are competitive, but no more so than before.

The key to our continued success is adding innovation to the equation, which in turn brings value to our customers. That value is being added today with customers from the smallest physician office to the largest retailers in the world. For example, last month our US pharmaceutical business brought together thousands of independent pharmacy owners and pharmacists to our annual trade show to learn about the industry's latest trends impacting their business. During the event we underscored McKesson's commitment to helping independent pharmacies achieving better results and better patient health.

At the conference we highlighted solutions that help independent pharmacists enhance patient loyalty and outcomes and broaden the range of services they provide. Solutions like McKesson's sponsored clinical services network, which enables independent pharmacists to play a greater role in providing patient care and services, in addition to growing their revenues. Sponsored clinical services is a network of 13,000 community pharmacies delivering a suite of patient centered programs including education, support, and behavioral coaching.

The network streamlines the relationship between pharmacies, manufacturers, and payer sponsored programs focussed on increasing adherence and improving patient care. Participating pharmacies benefit from the opportunity to increase customer loyalty, earn service fees and build their relationships with patients as a partner in their healthcare. We also demonstrated new social, web and mobile technologies to help our customers connect with their patients and with healthcare peers in entirely new ways.

A significant number of attendees were Health Mart pharmacy owners and pharmacists. With nearly 3,000 stores across the country, Health Mart has become the franchise model of chose for independent pharmacy owners looking to compliment their local identity with a national brand. Health Mart continues to invest in new solutions to help these stores grow their business, including private label over the counter healthcare products and new consumer facing web and mobile platforms.

In our Canadian distribution business, we performed as we expected in the first quarter. We did have four fewer sales days in the quarter compared to prior year. So as a result, revenues were down 4% on a constant currency basis. The team continues to do a tremendous job of integrating the recent acquisition of Katz and I'm pleased to see the early positive results from these efforts.

Turning to our medical surgical business, we continue to be very pleased with the performance of this business. Revenues were up 9% for the quarter. We've enjoyed good organic growth and gained new primary care and extended care customers in addition. We have a great position in these markets and we offer a compelling value proposition to our customers through the services and technologies that we provide. As physicians move to practices and larger groups which can be affiliated with or owned by hospitals or integrated delivery networks, McKesson participates in this growth by offering products and technology that service the unique needs of these larger customer markets.

As I mentioned in my opening comments on the distribution segment, it is often our technology that differentiates McKesson in our conversations with customers. For example, our medical surgical business offers technology that helps our customers better track and manage their inventory, saving them time and money. Individual group practice and affiliated physicians also benefit from our revenue management solutions business, which is actually part of our technology solutions segment. McKesson revenue management solutions offers leading outsourced financial and billing solutions, helping our physician customers focus their time on providing quality patient care.

In summary, I'm pleased with the performance of our distribution solutions segment. We are well positioned with our successful proprietary generics program and we are benefiting from a period of significant generic product introduction. Our recent acquisitions in this segment, US Oncology and the Katz acquisition, are both performing well and adding important strategic capabilities and scale to better serve our customers. Our medical surgical business continues to win with customers through our combination of great service and great technology. We're off to a solid start and we are confident in our outlook for the rest of the year.

Turning now to technology solutions. Our performance across the segment at this early point in the year is in line with our expectations. Revenues were up 4% for the quarter and adjusted operating margins were roughly 13%. We continue to make steady progress across all of our technology businesses. We remain committed to ensuring our customers' success and supporting them on their journey to reaching important meaningful use milestones. The domestic healthcare services industry is in a period of time where the focus is on automating healthcare.

Taking a step back, all of the time, money and energy spent converting the old paper based healthcare data into electronic records will only work if that data can be used by our customers to see trends and make changes in care and affect those trends. By connecting financial information and clinical information, our customers can use their data to not only improve their operations but improve patient outcomes. Across all three of our technology businesses, you've heard us talk about the importance of providing business intelligence capability. So I wanted to take a moment to give you a little more insight into what we are doing for our customers.

In our provider technology business, we have analytic solutions in more than 1,000 solutions, including core McKesson customers and many customers who operate on other core systems. Our analytics solutions enable customers to gather data from across their organizations and present that data to medical staff in a meaningful way to improve patient and business outcomes. This can be done at a high level or at a very detailed level with the common goal of optimizing interaction with and care for the patient.

Using our McKesson enterprise intelligence solutions, our customers have achieved significant results. For example, one of our customers used McKesson technology along with internal process changes to significantly reduce ventilator acquired pneumonia in its facilities. They did this by leveraging visual alerts, consistent with their protocols for complex care to help caregivers deliver the right care at the right time.

Another product recently launched by RelayHealth is Relay Analytics Pulse. It enables hospitals and health systems to monitor their own key performance metrics and compare their financial health with other organizations and peers. With our other analytics solutions there is a long lag time between data aggregation and the delivery to the end user. Some competitive solutions provide benchmarking data that is much as a year old. Relay Analytics Pulse provides daily data updates, which is a unique and compelling capability.

In our health solutions business, actionable business intelligence is core to the underpinning of our payer focussed technology products and services. One example is our claims analysis service, which is part of broader total payment solution. Customers using McKesson's total payment solution can successfully adjudicate claims under an increasingly complex mix of current and emerging value based reimbursement methodologies. One of the powerful features of this solution is the embedded claims analysis service, which helps our customers identify opportunities where they can realize additional medical and administrative savings by enhancing their claims' payout automation processes.

Taking this back to my opening comments on the Supreme Court ruling on the Affordable Care Act, our analytics solutions are one of the many ways we are focussed on helping our customers achieve sustainable cost reduction, provide timely insight to their operations and promote value within the healthcare system. This is becoming a top of mind issue for all of our customers.

In summary, I'm pleased with our results this quarter, which represent a good start to fiscal 2013. In addition to our operating performance, we continue to have a strong balance sheet. Our expectations to deliver cash flow from operations between $2 billion to $2.5 billion for fiscal 2013 remains unchanged from our original guidance. With that, I'll turn the call over to Jeff and we'll return to address your questions when he finishes.

Thanks, John, good afternoon, everyone. As you just heard, McKesson delivered solid first quarter results and is off to a good start for the new fiscal year. Let me begin by briefly mentioning two items that while not impacting our adjusted earnings, did impact our GAAP results this quarter. Specifically, $16 million AWP litigation charge and the $81 million pretax acquisition-related gain.

First, as John highlighted in his remarks, we continue to work through the remaining AWP claims. As a result of the progress made towards resolving these remaining claims, the litigation reserve has been increased by a pretax charge of $16 million. This charge has been reported in the distribution solutions segment and it equates to $0.04 per diluted share. Second, as I discussed on our April 30 earnings call, in the first quarter, we completed a business combination in which we acquired the remaining 50% ownership interest in our corporate headquarters building. The way the accounting rules in this area work, this creates a pretax acquisition related gain of approximately $81 million. Similar to how we treat other acquisition-related items, this transaction has been excluded from our adjusted earnings results.

My remaining comments today will focus on our $1.55 adjusted earnings per share, which as you recall includes three types of items, amortization of acquisition related intangibles, acquisition expenses and related adjustments and certain litigation reserve adjustments. The numbers I'll review in my discussion today will all be based on adjusted earnings basis, which can be found on Schedules 2 and 3 included in today's press release.

Let me now turn to our consolidated results for the quarter, which can be found on Schedule 2. Consolidated revenues, $30.8 billion for the quarter, up 3% from the prior year with both segments contributing nicely to this result. On this 3% revenue growth, adjusted gross profit for the quarter increased 6% to $1.6 million. Total adjusted operating expenses of $1 billion were up 5% for the quarter, roughly in line with the overall growth of the business. Other income was flat for the quarter at $8 million. Interest expense declined $8 million versus the prior year, to $56 million, driven primarily by the repayment of $400 million in long-term debt in February of fiscal 2012. Moving now to taxes.

Our adjusted tax rate for the quarter of approximately 28% benefited from $17 million of net favorable discrete tax items. As I mentioned in our investor day in June, the $17 million of net favorable discrete items did come earlier in the fiscal year than we had originally planned, and as a result this pure timing shift from later in the fiscal year added roughly $0.06 to $0.07 relative to what we originally expected for our first quarter performance. Looking to the full year, however, we are still tracking to the 31% adjusted tax rate that we included in our original guidance assumptions. Adjusted net income for the quarter was $372 million, up 15% from the prior year. Our adjusted earnings per share was $1.55, an increase of 22% compared to last year's adjusted EPS of $1.27.

To wrap up our consolidated results, diluted weighted average shares outstanding decreased by 6% year-over-year to 240 million. This year-over-year decline is primarily due to the cumulative impact of our share repurchases, which include more than $3.9 billion of share repurchase since Q1 of fiscal 2011. This is a testament to the strength of our cash flows and balance sheet, particularly since over this same time period we also spent over $3 billion on acquisitions including US Oncology, and the Katz acquisition. Turning back to share count for fiscal 2013, we continue to expect our full year average diluted share count will come in around our original guidance assumption of 239 million shares.

Let's now move on to our segment results, which can be found on Schedule 3. Distribution solutions overall revenue growth was 3% compared to the same quarter last year. Looking at the components, direct distribution and services revenues were up 2% for the quarter, to $21.3 billion. As always, there are some moving pieces here.

We had some customer wins and losses, which roughly offset. We benefited from an increase in volume with certain existing customers. And the branded price increase environment roughly offset the loss in brand revenues from new generic launches. Our warehouse revenues increased 9% year-over-year, primarily benefiting from expanded volumes for existing customers. For the full year we continue to expect unusually strong growth in our warehouse line.

Moving on to Canada, on a reported basis revenues were down 8% for the quarter. There were really two main drivers of this result. The impact of having far fewer sales days in the quarter this year, and an unfavorable foreign currency impact. When you adjust for both of these items, Canadian revenues grew 2% for the quarter. We are pleased to see this growth in our Canadian revenues, given the government-imposed price reductions on generic drugs that we have been talking about for some time.

To stay on Canada for one more minute, I do want to remind you that the Katz acquisition does not have a material impact on the revenues as we were already providing distribution services to the Katz stores. The acquisition does, however, favorably impact our adjusted gross profit, and it also added one to two percentage points to our distribution solutions adjusted operating expense growth this quarter.

Turning now to medical surgical, revenues were up a strong 9% for the quarter to $795 million, driven by market growth and new customers. Adjusted gross profit for the segment increased 8% for the quarter to $1.2 billion, under 3% revenue growth. Overall, we are pleased with this result. We did, of course, have tremendous growth in our oral generic profits this quarter, but this was somewhat offset due to the year-over-year decline in specialty generics, and also due to the mix impact of the strong warehouse revenue growth we posted. Remember, that the impact on our earnings of higher warehouse revenues is quite modest, as we earn lower margins on our warehouse revenues, relative to the margins on our direct revenues.

Distribution solutions adjusted operating expenses were up 7% for the quarter, primarily driven by the Katz acquisition and some charges we recorded this quarter related to the optimization of our Canadian network. When you exclude these two items, our adjusted operating expense growth was closer to 3% to 4% for the quarter. Adjusted operating margin rates for the quarter were 185 basis points, an improvement of 9 basis points. Given the quarter variability of this segment, we always focus, as you know, on full-year margins. This context, for full year fiscal 2013 we continue to expect adjusted operating margin improvement in the mid to high single-digit basis points compared to our full-year fiscal 2012 adjusted operating margin rate of 210 basis points. In summary, we are pleased with the solid first quarter performance in distribution solutions.

Turning now to technology solutions, total revenues were up 4% in the quarter to $838 million, with all businesses in the segment contributing to this growth. Adjusted gross profit for this segment increased 1% to $388 million. Technology solutions gross R&D spending was $113 million, compared to $105 million in the prior year. Of this amount we capitalized just 6% versus 10% a year ago. Adjusted operating expense increased 6% in the quarter to $280 million, primarily driven by growth in the business and the increase in net R&D spending.

Our technology solutions adjusted operating profit was down 8% versus a year ago to $109 million, and our adjusted operating margin was 13.01% compared to 14.84% a year ago. Overall, these results were in line with our expectations. As first mentioned on our April 30 earnings call, we continue to expect results in this segment to be weighted towards the back half of this fiscal year. With respect to the full year, we continue to expect our adjusted operating margin to be in the low end of our long-term technology solutions adjusted operating margin goal range of mid-teens, or 14% to 16%.

Leaving our segment performance and turning briefly to the balance sheet and our working capital metrics. As you've heard me say before, each of our working capital metrics can be impacted by timing including the timing of payments or what day of the week marks the close of any given quarter. So this quarter our receivables were $9.6 billion, up from the prior year balance of $9.4 billion, with our days sales outstanding decreasing to 24 from 25 days last year. Compared to a year ago, inventories increased 6% to $10 billion and our payables increased 4% to $15.2 billion. This resulted in our days sales inventory increasing by 1 day to 31 days, with our days sales and payables increasing by 1 day to 47 days.

In the quarter, we used $552 million in operating cash flow. There were two primary drivers of this result, which is a little unusual. First, to remind you, in the quarter, we made $273 million of payments on previously-accrued AWP liabilities. Second, this quarter was impacted by some inventory purchasing and payable patterns that should reverse out in the September quarter. So overall for the full year, we continue to expect our cash flows from operations, will be between $2 billion and $2.5 billion.

We ended the quarter with a cash balance of $2 billion and we remain confident in our ability to create shareholder value through the continued use of our portfolio approach to capital deployment. Overall, our gross debt to capital ratio was 33.2% for the quarter, well within our target range of 30% to 40%. Internal capital spending was $84 million for the quarter and we continue to expect full-year internal capital spending between $425 million and $475 million. Now I'll turn to our outlook.

Our first quarter results were solid and on track and as John mentioned earlier, we're maintaining our guidance on adjusted earnings of $7.05 to $7.35. One other point about our fiscal 2013 outlook, we expect $0.54 for amortization of acquisition-related intangible assets and due to the AWP litigation charge we recorded this quarter, we're now assuming $0.04 for litigation reserve adjustments. In addition, as a result of the $81 million pretax acquisition related gain, we now expect acquisition expenses and related adjustments to add approximately $0.19.

Thanks. With that, I'll turn the call back over to the operator for your questions. In the interest of time I would ask that you limit yourself to just one question and a brief follow-up to allow others an opportunity to participate.

(Operator Instructions) Glen Santangelo, Credit Suisse.

I want to ask a few questions on the out margin within your distribution solutions segment. John, given some of the high profile deals in the marketplace, if you're seeing that, have any impact on pricing, in particular your sell side margins as it relates to new business. Secondarily, I was curious if you're seeing anything new with respect to branded price inflation or generic pricing that maybe makes you more or less confident in the margin outlook.

Let me start at the end of that conversation and work my way back the other way. On the branded and generic pricing, our trends are basically in line with what our expectations were as we came out with our plans for the year. Albeit, a couple of big launches early in this quarter probably were a little more competitive than we expected but in the mix of things, we're feeling good about where branded and generic price trends seem to be headed. Obviously it is still early in the year.

As it relates to pricing margins delivered through our customer relationships, as you know, we focus on long-term value with our long-term customers and we continued, as I mentioned in my prepared remarks, to sell solutions and technology to our customers in combination with distribution that helps differentiate what we do everyday. I think that is obvious in our margin structure that we not only do a great job of delivering day-to-day service in a very productive way and in a really low cost, but I think we also are afforded an opportunity to sell solutions to our customers that enhance their performance and deliver sustainable value that may take the focus more on value delivered rather than price for the service. And I think that is the way the customer should make a decisions and we try to stay out of price only conversations.

One last comment on market pricing, as you know, we spend most of our time focused on our existing customers. So I can't tell you I have a big experience set with the new customer comment that you made. We don't bring out a lot of new customers, we've been focused heavily on our existing business and making sure those renewals are happening the way they always have historically.

Larry Marsh, Barclays.

Thanks, and good afternoon, John and Jeff. My question centers on some of the comments you made at your analysts day and I want to tie that into your comments today. It seems like the theme certainly analysts day was around the balance of the business, the mix of the business that is allowing you great results over a longer period of time, obviously very solid results. Today you continue that trend. In addition to that, though, you've got an outlook that I think, John, you highlighted is going to be subject to a lot of change with healthcare reform, and an environment with a greater focus in the customer environment around generics and the value proposition there.

My question really is if you think about this year, you've gotten customer relationships that are up for renewal toward the end of the year. You have had a really good record of renewing those. You also have another grocery customer who said they may be up for sale. So how do you balance that and specifically my question is in an environment where everybody is chasing after generic dollars, what are you doing specifically in this environment to differentiate yourself so that the conversation moves away from just pricing and continues to drive toward what you define as a differentiated value proposition?

I think the pressure that our customers are feeling this year is probably not that much different than the pressures they've felt in the past. I think we've always had a competitive environment and certainly our customers have always been afforded the opportunity to not only buy from other wholesalers but they have been afforded the opportunity to buy generics from various channels, including direct. Our challenge over the years has been to build a portfolio of capabilities, both in terms of the price of the product that we provide, but also in terms of the service that we can provide, in particular, to our customers on generics, that they may not be able to deliver on their own or in some other model.

Obviously there is tremendous operational efficiency to place one order at night and the next day receive all of your product to all of your stores from McKesson and not have to fragment those orders through your own internal capabilities, through some kind of an internal direct sourcing capability or to fragment it through other smaller companies that are out there trying to sell generics as a sole offering. And our ability to focus our customers on the total value that we deliver has to remain key, and our ability to remain disciplined around the price that we deliver to the marketplace charging for the value that we deliver, not chasing commodity price and focussing on those customers that really appreciate what we do.

I think if we didn't have confidence that we could continue to expand our margins in spite of some of these pressures that continue, we wouldn't have guided this year to the margin expansion that we've already guided to and clearly we are already above the market and believe that we can continue to be relative to our peers in terms of operating margin, because of the mix of our business, because of the value that we well, because of the discipline in our selling process and our focus on those continued evolution of that strategy.

Having said all of that, clearly things can change. Our view is that nothing has changed thus far and things remain competitive, but stable. It's always one of those deals that you have to pay attention to what is going on in the market and stay focussed. But I think we remain optimistic and nothing has changed from our analysts meeting.

Jeff, you did a good job of calling out the tax good guy at the analysts meeting, which obviously you saw and the message is the rest of the year is going to accrue back to, as you say that 31%. Notwithstanding the fact that you usually don't think about guiding to quarters or the puts and takes, now that you've gotten through the first quarter, is there anything of note that would lead you to think about any different progression of earnings versus last year, and for the next couple of quarters?

The short answer, Larry, is really no. This was the one big group of tax planning initiatives that we thought we would get to this year and it came a little earlier. The rest of the tax rate will be similar and our quarterly results the rest of the year will be subject to the same kind of variability that we always have, including back half loaded technology solutions quarter, the usual strong March quarter and distribution solutions just due to the structure of our agreements with many brand named manufacturers. But I think really none of that is particularly different from where we were on April 30.

Lisa Gill, JPMorgan.

I just wanted to follow up on a comment, John, that you made around the strong warehouse sales and the fact that you expect them to continue. Could you just talk about what you're seeing from a customer perspective around warehouse sales. And then, secondly, the inventory purchases, is that tied to the increase in warehouse sales or are you seeing opportunities from in inventory appreciation perspective?

It is really not inventory, Lisa, as much as existing customers who are gaining some share and I think continued view that our warehousing operations provide benefit to those customers and the synergy that they otherwise wouldn't obtain on their own. As you know, some of our larger customers have experienced some share shift this year as a result of contracts that they may have won, that would flow through that, or market share changes that have taken place in the chains that have been very visible in the industry. Other than that, there really hasn't been any significant action and Jeff you might have something you want to add there.

I want to make two points on warehouse sales, I just remind you that is really not a standalone product. It is a combination that is very valuable to certain of our very largest customers who also do lots of direct-store business with us and we think of those relationships as an overall economic relationship. On the cash issue, maybe I managed to confuse people.

So the day of the week that the quarter ended and just the way we happen to have some of our inventory purchases fall, drove a bunch of cash into the September quarter that in past years would have fallen into the June quarter. It had absolutely nothing to do actually the with the growth in warehouse sales from one of our largest customers and certainly wasn't tied to, if you go back a few years, with anything going on, on the buy side, really just timing of when things got stocked up.

As one other follow-up, would just be around med-surg, you talked about 9% growth in the quarter which is very good growth. Can you talk about what you're seeing as far as underlying growth for that business segment versus what sounded like some competitive wins in this segment in the quarter?

I think the market growth rates, Lisa, are probably in the 3% to 4% range. You might recall that we have a strong position in physician office, we have a strong position in long-term care, and we have a strong position in home healthcare and the miscellaneous side of things. And all three of those segments or pieces of the business had very strong growth and above market growth. I think our combination of service and the technology offering that I mentioned earlier that has really changed the face of delivering product to delivering more complete solutions has made a difference.

The migration of physicians out of small practices into more aggregated practices, we're seeing that phenomenon both at US Oncology, our revenue cycle management business and med-surg business where this aggregation actually plays to our strengths because these customers are more sophisticated, they are more technologically oriented, they appreciated the value that we deliver. They're not just price oriented, they are more value focussed and we are able to beat the competition who primarily have been focussed on moving boxes from point A to point B at a low price. I think this larger value proposition is helping us win in med-surg.

Bob Willoughby, Bank of America.

You guys came in well under by D&A assumption for the year. I was curious is this in the ballpark of a run rate use rate going forward, and can you comment on the other income line. There was a nice gain there but what is the run rate for the year on that line item?

On the D&A, do you mean overall D&A or are you talking about the acquisition related amortization?

Just what your target for the year would be.

Well on the acquisition-related amortization -- for the full year would be $0.54 based on all the acquisitions that have completed to date. If you are looking at broader depreciation and amortization, there is not anything going on unusual from quarter-to-quarter, so you should be able to take that number and annualize it.

With the Katz deal I was surprised it didn't rise in the first quarter.

Remember, we have been an acquisitive company for many, many years. When you think about acquisition-related amortization, some of it starts to drop off over time. I have to remind you, for example, we bought Per-Se back in 2007, or thereabouts, and so some of those charges are starting to roll off.

The other income, there are some variability there, what is a good run rate?

The other income is going to vary by a little bit each quarter, but there's nothing particularly unusual this quarter, and so I would still take a mixture of looking at last year's number, look at this quarter's number, annualize it, pick something in the middle and that's going to get you pretty close.

Tom Gallucci, Lazard.

John, I'm not sure if there is an easy way to answer the first question but certainly you talked about your total value proposition as one way to combat the competitive pressures out there and help your customers become more efficient over time. Is there any measure that you can point to in terms of maybe your multiple services per customer, or something like that, that you can actually see how you're gaining from that standpoint in having that broader array of offerings?

I think if you look at our track record over the last decade we have been able to show evidence of our ability to not only grow in line with the marketplace in almost all of our businesses, or above in the businesses where there was still opportunities like med-surg, for example. I think the fact that our margins have expanded at a nice rate show that there is a value orientation to what we're doing and our customers are not only focussed on price and we're selling that value. You've heard us talk about our various offerings on calls like this, in our analysts meetings, and with customers if you go to various events that we might be having, and I think a good example would be our ability for independent pharmacies to tie our own software systems for point of sale and the automation of the pharmacy dispensing process behind the counter, with our RelayHealth pharmacy network to help them adjudicate their claims and optimize their performance along with the automation equipment behind the counter to help them reduce labor and improve productivity and wrap that in the Health Mart franchise.

There are very few, probably not any companies in the industry that can combine wholesaling with all of that capability under one umbrella in a more integrated way. For example, Relay, would have share in our competitors customers from a distribution perspective, but when we tie it into our own customer base, our customers realize the value that they otherwise wouldn't achieve because of the integration with the systems we're able to provide. There is a simple example and clearly internally as we manage our book of businesses, we look at the overlap between hospital distribution and pharmaceuticals with the physician office distribution of medical supplies and those same integrated networks with the IT footprint we have installed, the robotic systems we have in place, and the cabinets we have on the floor.

So you will recall that 10 years ago other companies were pursuing this more integrated approach, and I think that today we're really the only ones who got the technology footprint to pull it off, and I think it's been successful for us. Now clearly that success wouldn't happen if we couldn't get the price right and the service right. That earns us the privilege to talk about these other things.

You touched on the competitive landscape, I think a lot of those comments were more focussed on the traditional oral solid side of the business. How would you characterize the landscape at this stage of the game in the specialty side? Obviously some peers may be trying to build that business, others have been in it and are pretty big and defending some turf. Anything unusual or new going on there?

I think the biggest change we've seen in the specialty side of the business is the continued interest that physicians have to reach out and get help from someone who's capable of providing that help. So standalone community oncologists, as an example, are looking for opportunities to automate, opportunities to buy better, opportunities to improve their ability to attract and retain talent and manage their offices, attract patients, adopt best demonstrated protocols. A whole myriad of things that have caused them to have an increased interest in networking with each other. And clearly our acquisition of US Oncology not only provided us with significant scale, but gave us some capabilities, frankly, that are untouched in the industry in terms of our ability to have an intimate relationship with a physician, allowing them to get back to clinical care while we take over some of the administrative tasks.

Clearly some of them may choose to sell out to a hospital and some may choose to move into a group that is not affiliated with US Oncology. But I think the days of independent physicians in probably all of our markets are beginning to wane and the aggregation of physicians plays well to the strategy that McKesson has been laying out for the last decade and I think we'll benefit from that.

As it relates to competitive pressures in these markets, I think it is fair to say the distribution has always been competitive and it is particularly competitive if you find it difficult to differentiate your service. And so we've been attempting to go train our sales force to sell on value. We try to incent them to maintain these relationships and renew them over time. We try not to chase price oriented only buyers because it ends up as a futile exercise anyway and I think we have been successful at that.

Robert Jones, Goldman-Sachs.

Looks like you guys ended the quarter her with about $2 billion in cash, so just looking at an update on potentially implementing a more meaningful buyback in this fiscal year, or are there specifically areas you guys are evaluating right now on the M&A front, just looking for an update around capital deployment.

I remind you that, yes, we ended with $2 billion of cash and while we don't call out the off shore cash each quarter, back in March it was about $1.4 billion. A good chunk of that cash is off shore. Certainly we build into our plan each year some amount of share repurchase. We don't call that out publicly. And, frankly, we manage a little bit based on what the acquisition environment offers us, how the year is going relative to the overall targets we've set, et cetera. We have, as a reminder, about $1 billion in outstanding authorization right now from our Board.

On acquisitions, I don't think anything has changed. As usual, we see a range of alternatives and opportunities across almost all of our businesses in both segments where there are companies out there that we think we can uniquely create some value with. It is tough to predict when any of those companies are either available for sale or more importantly, available for sale at prices that make any sense for our shareholders.

It is also fair to say there is lots of volatility in those valuations as you look at the quarters tick by. I think patience has been one of our virtues as well.

Just to confirm around the guidance, obviously reaffirm EPS range, assume the full year diluted share count you laid out is intact then?

Correct. I specifically pointed out that we are sticking with our 239 million share outstanding for the year assumption.

I wonder if I could sneak in on the technology solutions segment, looks like you were a little bit shy of the long-term target. You said today that you expect to be in the low teens range. I was curious if there was anything specific in the quarter that weighted below that average or what do you guys expect over the next three quarters that should get it back into that range?

This is really mechanically as simple as we told you back on April 30 that this year it would be unusually back end loaded just due to some product GA's that we have in the back of the year that will hold up rev rec until they happen later in the year. So actually the quarter came in very much as we had expected.

Ricky Goldwasser, Morgan Stanley.

For US Oncology, we've heard earlier today some talk about oncology practices consolidating and gaining purchasing power. John, based on your earlier comments in the call, it sounds like McKesson is in a very good position to be a share taker. So can you talk a little bit how fast is the US Oncology physician base growing?

What I should have said or meant to say is we are optimistic that our solution set is attractive to physicians and whether they're existing physicians of ours that are aggregating together or whether they're physicians who don't use any of our services that are aggregating together, will be seen over time. Our goal is not to gain share for share sake. Our goal is to grow our business in a profitable way with customers that appreciate the value that we deliver. We don't plan to compete in a way that doesn't take a holistic view of what we have to deliver.

The customers that are interested in the US Oncology relationship with us are the more sophisticated customers that, frankly, have moved beyond their evaluation from simple distribution services to something much more significant, and so those are the customers that are usually open to that dialog. I think that we will continue to see progress. Healthcare is a slow-moving world, and I don't think you're going to see sea changes, but I think directionally our view is that we're positively positioned.

On your warehouse sales, do you expect any impact to warehouse sales in the second half now that Walgreen and Express reached an agreement? Is the potential reversal in some of the share gains that we've seen earlier in the year?

We're a little distant from this, Ricky, in that these questions our customers are bettered suited to answer. From a distance, I would say that there are probably some customers who will move back to a -- their incumbent relationship of Walgreen's, but there are probably some customers that have moved away from Walgreen's and have found another store that is as convenient as where they were buying before. I really don't feel I'm well positioned to talk much about the share move. I would say relative to our warehouse view, I don't think you'll see any material change to our warehouse sales as a result of anything that is going on in the industry.

Eric Coldwell, Robert W. Baird.

Generics, I was curious if we could get the impact on revenue in the quarter.

Do you mean, Eric, in terms of generic revenue growth?

I'd like to get both, actually, revenue growth for generic, if you will, and then also the impact on branded conversions.

For us, given our mix of customers and drugs, the interesting thing is if you look at the revenue decline due to branded drugs losing patent protection, it almost completely matched and was offset by the growth in generic revenues due to all of the generic launches. So they are almost identical in size.

At the end of your prepared remarks, Jeff, you said something about $0.19 being additive to the number this year. I think I heard that but the phone cut out, so I was hoping you could refresh me on that.

Yes, we have the unusual accounting around our acquisition of the remaining 50% of the headquarters building we have been in since the 1960s, and so that drives an $81 million gain. We're pulling it out of our adjusted earnings because it is acquisition related, so that gain, netted against a $0.02 of acquisition expenses, means that you're going to, as you do a reconciliation from GAAP to non-GAAP, you have a $0.19 good guy that you add to the non-GAAP to get to the GAAP.

George Hill, Citi.

Jeff, you guys are doing well in the distribution part and the real estate investment part, it seems. I'm going to ask a quick question, though, two follow ups on the healthcare IT business. John, could you give us an update on how the clinical conversions are going from the Horizon business to the Paragon business. Maybe this one is a little weedsy, within the RelayHealth business, as we are starting to see e-prescribing come up the curb and utilization get pretty high, how should we think about the growth in Relay profitability going forward?

I asked Jeff to go out and look at other real estate we can buy and record gain, so we're going to try to do that.

I'm in the market for a house. If you guys want to go looking for me, I'd love to help.

We'll buy it book of gain and give it to you. The clinical conversions, when we talked about our Horizon to Paragon strategy, we talked about the fact that we believe it is a viable solution for our customers and that over time they need to evaluate that as an alternative because of its more tightly integrated infrastructure and its lower cost operations. It also has some build-out required to fully function in the way all of our Horizon customers would required. We've seeing many of our Horizon base evaluate the product.

We've seen some of the base already contract to move to Paragon and some already have moved because of whatever remaining development is necessary on Paragon was not of import to those customers. Others have said, we're going to go but we want you to build out another module or we're going to go after we get our meaningful use dollars settled and we have a bit of a breather. Others frankly will probably wait until they have their meaningful use 2 or meaningful use 3 situation well in hand before they make that migration.

So I think we've made good progress. I, frankly, continue to be pleased with the reception our customer base has given to the Paragon solution, and frankly, taking it up a level, I think they're quite interested in the larger messages that McKesson has been delivering around our payer business and the need for the payer and provider solutions to come together, and also for our connectivity business.

And I think the RelayHealth question is a good one. We are really pleased with our position in RelayHealth. I have to admit that the e-prescribing portion of the markets transition is not a particular profit driver for us. We're in that transaction, both in our electronic medical record businesses as well as in Relay, but that's not really where the opportunity lies. The opportunity lies in the continued build-out of our financial systems. As you know, we process well over $1 trillion in financial claims over our networks.

Our pharmacy systems, which not only adjudicate pharmacy claims but also help us deliver more value to our customers through things like through e-voucher where the manufacturers and retailers work on behalf of the patient to provide better care, and other offerings that RelayHealth is building out, not the least of which is our new clinical information network or health information exchange. So I think we're pleased with our position on Relay. Electronic prescribing is a piece of it, but not the central driver financially.

Steven Valiquette, UBS.

This was some what addressed in a previous question, but in the healthcare IT we obviously have seen some choppy results from a few of your competitors. My question is, quickly remind us of the couple of drivers of the acceleration and the tech solutions profit growth you expect in the back half of the year. I'm trying to revisit your own level of visibility on your business plan for FY '13 for tech solutions in light of potentially changing market conditions. Are you worried about this, do you feel that you can achieve your targets regardless of market conditions? I'm trying to get a general sense of that.

I would think there would be pretty good visibility in tech buying at this point. And if it is a surprise to anyone that clinical buying is beginning to wane, they must not be deep in the industry. We believe our customers have largely made their clinical decisions and what is great about McKesson's technology platform is we're actually in many businesses as you are aware. We have three major lines of business there, our Relay connectivity business, our payer businesses, and clearly our provider technology business. Even inside our provider technology, in my prepared remarks, I talked about over 1,000 customers installed in our analytics products.

We have a market leading medical imaging business and some other lines that aren't clinical transaction processing businesses for hospitals. I think that we see the clinical buying beginning to wane, it has waned. We're in the implementation phase now. Actually if you look at our results under the cover, you will see our hospital buyers are beginning to come back to purchasing other solutions beyond clinicals and I think those companies that don't have a portfolio beyond clinicals are probably feeling the effect of a pipeline that is probably headed in a different direction. We're pleased with our performance. We think we have visibility to it through the rest of this fiscal year and we believe that business will perform in line with our expectations.

I think we've run out of time. I want to thank you, Anthony, and thanks to all of you on call for your time today. I'm pleased with our first quarter performance and excited about the opportunities that lie ahead for all of us. I'll now hand the call off to Erin for her review of upcoming events for the financial community.

I have a preview of upcoming events. On September 6 we will present at the Baird Healthcare conference in New York. September 10 we present at the Morgan Stanley conference, also in New York. On November 15 we'll present at the Credit Suisse Healthcare conference in Phoenix. We will release our second quarter earnings results in late October. We look forward to seeing you at one of these upcoming events. Thank you, and have a great evening.

Again, we thank you for joining today's conference. You may now disconnect.