McKesson Corporation (MCK) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the McKesson Corporation Quarterly Earnings Call. [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, Senior Vice President, Investor Relations.

Thank you, Travis. Good afternoon, and welcome to the McKesson's Fiscal 2015 Third Quarter Earnings Call. I'm joined today by John Hammergren, McKesson's Chairman and CEO; and James Beer, McKesson's Executive Vice President and Chief Financial Officer. John will first provide a business update and will then introduce James, who will review the financial results for the quarter. After James' comments, we will open the call for your questions. We plan to end the call promptly after 1 hour at 6 p.m. 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 LIFO-related adjustments. We believe these non-GAAP measures will provide useful information for our investors. Please refer to our press release announcing third quarter fiscal 2015 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, Erin, and thanks, everyone, for joining us on our call. Today, we reported solid results for the third quarter, with total company revenues of $47 billion and adjusted earnings per diluted share from continuing operations of $2.89. In addition to the solid execution across our business, our third quarter results benefited from a pull-forward of certain brand price increases into the quarter, which had previously been anticipated in the fourth quarter. Our third quarter results also reflect a lower-than-expected tax rate driven by the intense enactment of recent legislation. James will address both of these items in further detail in his remarks. I'm pleased with the strong performance of our business for the first 9 months of the fiscal year. We've updated our outlook and now expect adjusted earnings per diluted share from continuing operations of $10.80 to $10.95 for fiscal 2015. Before I begin my review of our business results for the quarter, I will provide a brief update on our acquisition of Celesio. During the third quarter, we achieved an important milestone with the formal registration of the domination and profit and loss transfer agreement. As I mentioned in my remarks last quarter, with this milestone now complete, McKesson and Celesio can begin our cooperative work to deliver the synergy case we have outlined, where we expect to achieve $275 million to $325 million in annual synergies by the end of fiscal 2019. We've established a new global procurement and sourcing office based in London to begin the work associated with realizing the synergy case we have outlined. The team, consisting of seasoned executives from both McKesson and Celesio, will focus on expanding our relationships with our manufacturing partners and further building upon our global sourcing capabilities. As the needs of the health care industry continue to evolve, broader global reach, channel influence and greater purchasing scale are increasingly important. We're excited to serve our customers as one of the largest pharmaceutical wholesalers and providers of health care services in the world. Moving now to our business results. Distribution Solutions had strong results in the third quarter with revenue of $46.3 billion, up 38% as reported and up 39% on a constant-currency basis. Distribution Solutions' adjusted operating profit was $1 billion in the third quarter, up 33% as reported and up 34% on a constant-currency basis. North American distribution and services, which includes our U.S. Pharmaceutical business, McKesson Specialty Health and McKesson Canada, delivered strong results for the third quarter, with 17% revenue growth on a reported and constant-currency basis compared to the prior year. This growth was primarily driven by strong growth within our existing customer base, including further penetration of our generics programs, solid market growth and the demand for recently launched drugs for the treatment of hepatitis C. Our U.S. Pharmaceutical business continues to deliver excellent value for our customers. During the third quarter, we were extremely pleased to have expanded our long-standing relationship with Omnicare, the nation's largest institutional pharmacy and a leading specialty pharmaceutical services provider. For over 10 years, Omnicare has partnered with McKesson for the distribution of branded pharmaceuticals. As part of our expanded agreement, McKesson will now have responsibility for the sourcing and distribution of generic pharmaceuticals as part of McKesson's proprietary, OneStop Generics program. We are proud of the value we deliver as our customers choose McKesson as not only their distribution partner but also their sourcing partner. Our customers value the strength of our OneStop program, our industry-leading service levels and the working capital efficiencies we are able to drive on their behalf. We also created outstanding value across our independent pharmacy customer base. I'm pleased to share that Health Mart was recently named Pharmacy Innovator of the Year by Drug Chain Review (sic) [Chain Drug Review], a leading pharmacy industry publication. We are proud to accept this award on behalf of all of our independent pharmacies who are in the front line caring for patients every day. This recognition acknowledges Health Mart for its commitment to giving member pharmacies the tools they need to thrive in their markets, its efforts to enhance and expand the scope of pharmacy practice and the pharmacy's consistent high-level performance in terms of patient satisfaction. We are privileged to partner with our Health Mart pharmacy customers and to provide the tools that enable them to grow their business and enhance the deep relationships they have with their customers. In summary, our U.S. Pharmaceutical business continues to deliver tremendous results as we strengthen and expand our relationships with our customer base. Turning now to our specialty business. We had another quarter of excellent results. In addition to the strength of our oncology business and the growth we are driving in other specialties, such as ophthalmology and rheumatology, McKesson's Specialty Health offers a tremendous value proposition to our pharmaceutical manufacturing partners. Our specialty manufacturing services span across the entire pharmaceutical life cycle, from R&D to post-commercialization and maturity. We are unique as a partner to manufacturers in facilitating clinical trials. US Oncology has conducted more than 1,400 clinical trials including 120 early phase studies, and more than 60,000 patients have participated in these trials conducted by US Oncology. US Oncology Research has participated in the development of more than 300 investigational products, including 51 FDA-approved cancer therapies, which represents nearly 1/3 of cancer therapies approved by the FDA to date. Manufacturers value our deep clinical understanding and the expertise through our provider-centered organization. We also have a leading technology set of assets customized for the needs of specialty providers and focused on driving better patient outcomes. And as the leader in community oncology, we have the benefit of tremendous scale in the market. I am pleased with the strong results of our specialty business in the quarter and believe we remain very well positioned to serve our customers and partners in this exciting market. Our Canadian business had another solid quarter with the results that were consistent with our expectations. In addition to the growth at our core distribution business, we are driving great results with our extensive base of independent pharmacies operating under one of our many banners, the expansion of our private-label generics program, Sivem, and the growth in our specialty business in Canada. Turning now to our results for international pharmaceutical distribution and services. Revenues for the third quarter were $7.3 billion, an increase of 7% on the underlying results of Celesio on a constant-currency basis. As I mentioned earlier, we are extremely pleased to have reached a key milestone on achieving operating control of Celesio during the third quarter. We're only just beginning to work -- to do the work to bring together these 2 great organizations, and I remain excited about the opportunities we see as we move forward together. Turning to our Medical-Surgical business. Revenues were $1.6 billion for the first quarter, an increase of 7% over the prior year. We continue to see solid growth across the alternate site markets we serve, and our third quarter results also reflect an increase in sales of flu vaccines and supplies compared to the prior year. We are entering the third and final year of our PSS integration efforts. We remain on track to deliver the synergies we had previously outlined, and I continue to be impressed with the progress made by our Medical-Surgical team. In summary, Distribution Solutions performed well in the third quarter, driving excellent service and value for our customers and delivering strong financial results. Technology Solutions' revenues were down 7% for the third quarter, driven primarily by anticipated revenue softness in our Horizon clinical software platform and the planned elimination of a product line, both contemplated in the original guidance we provided in fiscal 2015. Adjusted operating margin in the segment was 16.3% in the quarter, consistent with our expectations for this business. I am pleased with the progress we've made as we evolve our Technology Solutions portfolio. Increasingly, we are hearing about the shift toward value-based reimbursement in the delivery of health care. Just last month, the Department of Health & Human Services announced the goal of tying the vast majority of traditional Medicare payments to quality or value metrics by 2016. At McKesson, we are focused on helping our customers prepare for this shift to value-based reimbursement. And we have the unique expertise and set of solutions to position our customers for success as their businesses evolve. The important component of the shift to value-based care is enabling patients and providers to have a holistic view of the patient across different settings of care through data interoperability, which is why we are proud members of the CommonWell Health Alliance. The CommonWell Health Alliance continues to expand, with new members joining, additional studies of care added and more provider sites going live. Through CommonWell, we are committed to leading the industry towards a vision of patient-centered interoperability that moves us well beyond the challenges of today's point-to-point exchange towards an environment where the right health information is available to the patient at the right time. We will continue to focus on our key strategic priorities for Technology Solutions, including helping our customers reduce cost and operate more efficiently, providing our customers with solutions to drive improved analytics and supporting our customers' transformation to a world of value-based care. Now to wrap up my comments for Q3. We delivered solid results in the third quarter and I'm pleased by the great execution we have seen across our business. We've updated our outlook for the full year and now expect adjusted earnings per diluted share of $10.80 to $10.95 for fiscal 2015. In addition to the solid operating performance in the third quarter, we continue to have a strong balance sheet. For the first 9 months of the fiscal year, we generated cash flows from operations of $1.2 billion, and our expectation to deliver cash flows from operations of approximately $3 billion for fiscal 2015 remains unchanged from our original guidance. With that, I'll turn the call over to James. And we'll return to address your questions when he finishes. James?

Thank you, John, and good afternoon, everyone. As you've just heard, we are pleased with our third quarter operating results, driven by the solid performance of our Distribution Solutions segment. Late in the third quarter and consistent with our expectations, we secured operating control of Celesio. As we look ahead, we are working to execute against our previously articulated synergy case and are beginning our integration efforts. Today, I will walk you through our third quarter consolidated financial results and I will also provide an update on our fiscal 2015 outlook. Later in my remarks, I will highlight revisions to our financial statement presentation, subsequent to achieving operating control of Celesio, alongside key transaction milestones and assumptions. Before I review our third quarter results, there are 4 items that I'd like to bring to your attention that I hope will give you a better perspective on our performance in the quarter. First, in addition to the solid execution across our business, our third quarter results were aided by a lower-than-expected tax rate, primarily due to the passage of recent legislation. The related reduction in our tax expense for the quarter contributed approximately $0.13 to our adjusted earnings. Second, our third quarter Distribution Solutions' adjusted operating profit reflects a timing benefit, primarily from a pull-forward of certain brand price increases from our fiscal fourth quarter into our fiscal third quarter. This benefit contributed approximately $0.09 to our adjusted earnings. Third, during our second quarter earnings call, we discussed our average exchange rate assumption of $1.31 per euro, applicable to our fiscal 2015 adjusted EPS guidance range. While currency rate movements did not have a material impact on our adjusted EPS during the first half of our fiscal year, I indicated that we expected a negative foreign currency translation impact of approximately $0.04 during the second half of fiscal '15. The actual adjusted EPS impact from currency movements during our fiscal third quarter was approximately $0.03 per share. Given the recent strengthening of the U.S. dollar, we are now assuming an average exchange rate of $1.15 per euro in the fourth quarter. This would drive a negative foreign currency translation impact of approximately $0.04 to our adjusted EPS in the fourth quarter. In summary, the negative foreign currency translation impact on our full year adjusted EPS, as compared to our original plan, is now anticipated to be approximately $0.07 versus the previously guided $0.04. Lastly, we realized a $0.05 benefit from an update to our accounting for the noncontrolling interest in Celesio, which I'll cover later in my remarks. We now expect adjusted earnings per diluted share from continuing operations of $10.80 to $10.95 for fiscal 2015, based on a full year average exchange rate of $1.29 per euro. Now let's move to our results. My remarks today will focus on our third quarter adjusted EPS from continuing operations of $2.89, which excludes 3 items: Amortization of acquisition-related intangibles; acquisition expenses and related adjustments; and LIFO-related adjustments. Turning now to our consolidated results, which can be found on Schedule 2A. Consolidated revenues increased 37% for the quarter to $47 billion. On this 37% revenue growth, adjusted gross profit for the quarter increased 52% to $3 billion, driven by Celesio and the performance of our other Distribution Solutions businesses. Total adjusted operating expenses of approximately $2 billion were up 61% for the quarter. Excluding the impact of Celesio, operating expenses increased 3% for the quarter. Other income was $13 million during Q3. Interest expense increased 64% versus the prior year to $97 million, driven by debt issued and assumed related to our acquisition of Celesio. Now moving to taxes. This quarter's adjusted tax rate benefited significantly from the R&D and international tax provisions of legislation passed in December 2014, which applied retroactively to the beginning of the calendar year. The resulting benefit of approximately $20 million, in addition to other discrete items, reduced our Q3 tax rate to 28.7%. For the full year, we now expect our adjusted tax rate to be approximately 31%. Adjusted income from continuing operations for the quarter were $679 million, with our adjusted earnings per diluted share from continuing operations at $2.89, up 95% versus the prior year. Excluding Canadian tax reserve adjustments and the technology product realignment and impairment charges taken in the prior year totaling $0.70, our adjusted EPS was up 33%. As I discussed earlier, our adjusted earnings per diluted share this quarter benefited from a lower-than-expected tax rate and from a pull-forward of certain brand price increases from our fiscal fourth quarter into our third quarter. Collectively, these benefits contributed approximately $0.22 to our adjusted earnings from continuing operations per diluted share during the quarter. Wrapping up our consolidated results. Diluted weighted average shares outstanding increased by 1% year-over-year to 236 million. Now let's turn to the segment results, which can be found on Schedule 3A. Distribution Solutions' segment revenues increased for the quarter to $46 billion, up 38% on a reported basis and 39% on a constant-currency basis. North America pharmaceutical distribution and services revenues increased to $37.4 billion, up 17% on a reported and constant-currency basis. Current quarter revenue growth primarily reflects market growth and our mix of business, including strong growth from existing customers, continued demand for drugs used in the treatment of hepatitis C and the timing of certain generic launches. Driven by these factors, we now expect that for fiscal '15, our North America revenue will grow by a mid-teens percentage over the prior year. International pharmaceutical distribution and services revenues were $7.3 billion for the third quarter. On a constant-currency basis, revenues increased 7% on the underlying revenues of Celesio. Medical-Surgical revenues were up 7% for the quarter, driven by market growth, including the incremental benefit of a strong flu season. Distribution Solutions' adjusted gross profit increased 63% for the quarter on 38% revenue growth, resulting in an 87 basis point improvement in our adjusted gross profit margin, driven by our acquisition of Celesio and the market growth. Adjusted operating expense for the segment increased 90% for the quarter, primarily due to our acquisition of Celesio. Excluding Celesio, operating expenses for the segment increased 6% year-over-year. This increase was primarily driven by the strong revenue growth within our North America pharmaceutical distribution and services business during the quarter. The segment-adjusted operating margin rate for the quarter was 226 basis points, a decline of 8 basis points versus the prior year. This decline was driven by a higher mix of branded drug sales and an adjusted operating profit contribution from Celesio that was lower than we expected. Excluding the impact of Celesio and the hepatitis C drugs, the segment-adjusted operating margin was 248 basis points, an increase of 14 basis points over the prior year. Based on our anticipated mix of revenues, including continued strong demand for hepatitis C drugs and the lower contribution from Celesio, we now expect the full year Distribution Solutions' adjusted operating margin to be down mid-single digit basis points versus the prior year. Turning now to Technology Solutions. Revenues were down 7% for the quarter to $755 million. This decline was primarily driven by the anticipated revenue softness of the Horizon clinical software platform, the planned elimination of a product line and the wind down of our U.K. workforce business, partially offset by growth in our other technology businesses. For the full year, we now expect revenues to decline by mid-single digits year-over-year, driven by the factors I just mentioned and the impact of some large customers delaying certain contracting decisions due to competing business and regulatory priorities. Adjusted operating expenses in the segment decreased 11%, driven by our restructuring actions. Excluding the impact of charges taken in the prior year, operating expenses declined 8% year-over-year. Third quarter adjusted operating profit for the segment increased 60% to $123 million. Adjusting for the impact of prior year charges, adjusted operating profit increased 3% year-over-year on 7% lower revenues. The segment-adjusted operating margin rate was 16.3%. Adjusting for the impact of prior year charges, the adjusted operating margin was up 167 basis points year-over-year. I'll now review our balance sheet metrics. As you've heard me discuss before, each of our working capital metrics can be significantly impacted by timing. In addition, our working capital metrics also include Celesio. For receivables, our days sales outstanding increased 2 days versus the prior year to 26 days. Excluding Celesio, our days sales outstanding remained flat year-over-year. Our days sales in inventories remained flat year-over-year at 31 days. Our days sales in payables increased 5 days year-over-year to 52 days. Excluding Celesio, our days sales in payables increased 6 days to 53 days. We generated $1.2 billion in cash flow from operations during the first 9 months of fiscal 2015. Overall, for the full year, we continue to expect our cash flow from operations to be approximately $3 billion. We ended the quarter with a cash balance of $4.6 billion, with $2.2 billion held offshore. Internal capital spending totaled $405 million for the first 9 months of fiscal 2015. We now expect full year internal capital spending to be approximately $525 million versus our initial guidance of $575 million to $625 million. Now I'll turn to our adjusted EPS outlook. Let me once again remind you that our earnings this quarter was specifically impacted by 3 items that also affect our full year outlook. First, we benefited from a lower-than-expected tax rate which allowed us to reduce our full year adjusted tax rate to 31%. Second, the negative foreign currency translation impact to our full year adjusted EPS is now anticipated to be $0.07 versus the $0.04 previously expected. And we have now updated the full year average exchange rate applicable to our adjusted EPS guidance to a rate of $1.29 per euro. Lastly, based on our anticipated mix of revenues, including continued strength and demand for hepatitis C drugs and a lower-than-expected profit contribution from Celesio, we now expect the full year Distribution Solutions' adjusted operating margin to be down mid-single digit basis points versus the prior year. Considering these items and our year-to-date results, we are updating and narrowing our guidance for adjusted earnings from continuing operations to a range of between $10.80 and $10.95 per diluted share. With respect to GAAP earnings per share for the full year, we now expect $1.48 in amortization of acquisition-related intangible assets and $0.63 of acquisition expenses and related adjustments. We also expect to exclude between $0.97 and $1.07 per share in LIFO-related adjustments. Now let me take a few moments to talk about our updated financial statement presentation for the noncontrolling interest in Celesio. At the highest level, we continue to consolidate the financial results of Celesio and we continue to expect that our ownership of Celesio will remain at approximately 76% for the remainder of fiscal 2015. However, as a result of achieving operating control of Celesio in December 2014, some important changes were necessary to appropriately reflect McKesson's obligations to the minority shareholders of Celesio within our financial statements. When we initially gained greater than 75% of Celesio's fully diluted shares during the fourth quarter of fiscal 2014, you might recall that a line titled Net Income Attributable to Noncontrolling Interests was presented below our net income line on Schedule 1, which accompanied our press release. Through the second quarter of fiscal 2015, this line item primarily reflected the minority shareholders' claim to approximately 24% of Celesio's net income. Subsequent to achieving operating control this past December, McKesson now retains 100% of Celesio's net income. In exchange, McKesson is obligated to pay an annual dividend of EUR 0.83 per share to Celesio's minority shareholders. In today's results, this dividend drives approximately $50 million of the Schedule 1 entry for the 9 months ended December 31, under the heading Net Income Attributable to Noncontrolling Interests. This $50 million amount addresses our calendar 2014 dividend commitment to Celesio's minority shareholders. Beginning in our fourth quarter and continuing through subsequent fiscal years, this EUR 0.83 dividend will drive a quarterly expense of approximately $12 million, assuming our 76% ownership stake remains unchanged and an exchange rate of $1.15 per euro. Once again, these dividends will be recorded in the line entitled Net Income Attributable to Noncontrolling Interests. This change in accounting contributed approximately $0.05 to our adjusted EPS in Q3. We do not expect any material impact to adjusted EPS from the accounting change in Q4. Distribution's segment results as outlined on Schedules 3 and 4 continued to reflect 100% of the results of Celesio. The balance sheet, as reflected on Schedule 5, includes a new caption titled Redeemable Noncontrolling Interests. Subsequent to a pending operating control of Celesio, the carrying value of the noncontrolling interests in Celesio of approximately $1.5 billion were reclassified from equity to redeemable noncontrolling interests. This reclassification was triggered when noncontrolling interests in Celesio became redeemable, allowing put rights held by the minority shareholders to be exercised. As a reminder, these put rights allow minority shareholders to sell their Celesio shares to McKesson at a price of EUR 22.99. In summary, now that we have operating control of Celesio, we recognized 100% of Celesio's net income while owning only 76% of Celesio's outstanding shares. And for this benefit, we are obligated to record annual dividend compensation of EUR 0.83 per share or approximately $12 million per quarter, payable to Celesio's minority shareholders. In addition, our assumptions related to our previously articulated transaction synergies are unchanged. As mentioned by John, by fiscal 2019, we still expect to realize annual synergies between $275 million and $325 million. In summary, we've recorded 3 very solid quarters this year and we are excited to have secured operating control of Celesio. We expect the transaction to deliver tremendous value to our customers, manufacturing partners and shareholders in the years ahead. Thank you. And with that, I will turn the call over to the operator for your questions. [Operator Instructions] Travis?

[Operator Instructions] Our first question comes from Glen Santangelo with Credit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: John, I just wanted to follow up on some of James' comments regarding the noncontrolling interest piece of Celesio. So how do you think about it from this point going forward? It seems like a pretty straightforward capital deployment situation. You could either pay up to redeem the remaining piece or you could just let it continue to sit out there and make the dividend payment on a quarterly basis and reallocate that capital elsewhere. So given that you've already guided the market that you would reaccelerate capital deployment in fiscal '16, how do you think about that capital deployment situation from here?

Glen, thanks for the question. I think that you have the basics right. I believe the only thing that's missing in your assumption there is related to their ability to put the shares to us. So we look at it as a source of financing. We know what the put right is, we know what the dividend cost is on an annual basis and we know how much money is tied up related to this obligation. The only difference is that we really can't call those -- that right. We have to have it put against us. But I think just from our perspective, it's a source of financing and there is no longer any P&L or earnings upside by the consolidation of those remaining shares other than a reduction of the dividend, but replaced by whatever are the costs you have associated with the deployment of that capital. Glen J. Santangelo - Crédit Suisse AG, Research Division: Maybe if I could just follow up on some of the comments you made in your prepared remark regarding the global procurement office that you opened in London. Could you give us a sense for maybe what types of products we'd be purchasing out of there, or what percentage of your products? Can you do all your generics, branded, OTC? And then, James, how do we start to think about that having an impact on the company's tax rate over time?

Well, to begin with, I think it really is -- we've been focused on the sourcing on a private-label basis in an appropriate tax-efficient way for some time. I think the addition here with this expansion in London is focused primarily on generics and branded drugs, our relationships with the manufacturers and how we plan to go to market. And, James, maybe you can talk a little bit about tax.

Well, I would just observe that obviously now with a broader worldwide operation, we'll be looking at optimizing our tax position on a global basis, obviously, consistent with all the rules and regulations of each authority in which we're doing business. So I wouldn't want to point to anything in particular emanating out of London.

But, Glen, you did mention OTCs. And I do think that the addition of Lloyds Pharmacy through the acquisition of Celesio does give us a large footprint in OTC products and relationships that would expand beyond our typical branded and generic relationships, albeit that's probably a third leg to put into the strategy. We're going to focus on pharmaceuticals first. I do think there's a way for us to bring our other U.S. customers' and North American customers' demand for OTC products into this discussion at some later date.

Our next question comes from Lisa Gill with JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: John, I think you talked about the outsized growth coming from a couple of different areas, and one of the ones that you called out was hep C. Yesterday, Gilead came out and said -- or the day before that, came out and said that they would expect that they could see a 25% increase in the number of patients treated based on these new agreements that they've signed with managed care and PBMs. I'm just wondering how this stuff's going to impact your business going forward. Two things. One, would you expect that you would pick up a consistent amount of that market share? And maybe you can help us understand how much of the growth this quarter came from hep C? And then secondly, maybe if you could just help us to think about the margins around hep C and any other of these more expensive specialty drugs that are coming to market.

Thanks, Lisa, for the question. It's probably difficult for us to comment specifically on the number of patients that are not being served from a hep C perspective, and certainly some of the market share changes that might be forecast between the various manufacturers related to the market. This business for us is primarily government-related and mail order. So that we have a -- as you know, with our relationships both in mail and with the VA and the DoD, we have a heavy concentration of products in those markets and clearly, hep C is one of those products. The product is -- the hep C products are dilutive to our overall margins. And so from a revenue perspective, they're very positive from a growth perspective but they are not all that helpful on the bottom line. And I'd say that we -- our growth this quarter was certainly impacted by hep C but I might also say, we think we grew well in excess of market growth rates through our expanded relationships with our existing customers and the strength we've had in expanding things like generics into Rite Aid and the pull-through of generics in our other customer bases. So I think that we are feeling pretty good about the momentum we have in our base of business.

And, in fact, if I could just add, an example of that growth is in our OneStop program, where even aside from the growth that Rite Aid represented in OneStop, we still, in addition, grew OneStop 20% year-over-year. Specifically to the revenue contribution of the hepatitis C drugs, they drove about 4 points of the 17% growth that we saw in Q3 year-over-year. And as we're alluding to here, they're 1 of the 2 drivers, along with the Celesio contribution, that were driving our commentary around Distribution Solutions' margins in Q3 and for the full year.

We'll take our next question from George Hill with Deutsche Bank.

I guess, John, I kind of noticed that absent from the commentary of this call was kind of the thoughts on generic drug price inflation and 2 of your peers have kind of talked about moderating generic drug price inflation. I thought you might give us an update on what McKesson is seeing.

Our view on generic price inflation is basically in line with how we viewed the year as we came into the year. We said that we felt it was going to be generally flat with last year, perhaps slightly down compared to prior year. And I think our view has remained consistent and remains consistent as we think about what we've accomplished in the first 3 quarters and what we have in front of us. I would say it's difficult perhaps to compare the commentary between those in the industry because all of us look at generic price inflation, we define it differently, first; and then secondly, we all have different books of business with different manufacturers and have probably different exposure to all of this. So I would say that our quarter results in Q3 and what we're talking about for the rest of the year is pretty much in line with our expectations when we started the year.

Okay. That's helpful. And maybe a quick follow-up on Celesio. I'm going to assume that there were no Celesio synergies delivered in the quarter and you guys are sticking to your guidance on the procurement synergies. I guess at what point kind of in the process of the acquisition will you be ready to talk about operating synergies as opposed to procurement synergies?

Well, you're right. There really were no synergies in our results for the quarter related to Celesio. I mean we just achieved operating control, which allows us to go as a unified body to the marketplace, which this London operation is beginning to do, has begun to do in January and is continuing throughout the rest of this quarter. So the $275 million to $325 million has yet to be executed on, particularly from a product perspective. Now some of the tax savings that we forecasted there should begin to flow more quickly than the products side of it. As it relates to operating synergies, we have a bit of a path here to get the organization to where we think it can be operationally. And clearly, one of the big things we need to do is invest in the IT infrastructure that's necessary to help Celesio realize the advantage of scale and to be more productive in the operation. We have some work underway to help them optimize certain functions in terms of distribution and transportation. We're working on those initiatives. But clearly, it's probably too early to forecast any operating synergies related to Celesio as we think about the remainder of this year.

And I would expect that those items that John was just mentioning to be one of the drivers of our capital spending each year.

And in fact, to some extent, George, the synergy from an operating perspective in the early phases may be more of a dis-synergy as we invest more heavily than we get returns on in the early phases. And so we'll probably see actually a little more expense. Now clearly, the upside from this acquisition wasn't in significant operating synergy in the near term in Celesio. It was really about accomplishing our sourcing and procurement synergies. And we have no reason to believe that we won't be successful on that objective. And I think that, that is a first priority. The second priority is what do we do to assist Celesio in its operations. In the near term, that's probably more of an investment expense slash phase than it is a synergy that we deliver to the bottom line phase. So we're focused on doing both.

We'll take our next question from Ricky Goldwasser with Morgan Stanley.

John, you spent some time in the prepared remarks talking about the specialty business and the opportunities there. Can you help us quantify what percent of the 17% top line growth came from specialty? And I'm assuming that specialty segment is excluding the HCV benefit. And what are the specific areas within specialty that you're seeing most growth from? And then I have another follow-up.

Well, I mean, our specialty business, once again, it's similar to the other themes in this conversation. Probably each person participating in the industry may define specialty differently. When we talk about specialty, we're not talking about hepatitis C drugs or some of the things that have impacted our revenues in such a significant way. What we're talking about are primarily oncology products and some of the other -ologies like rheumatology and ophthalmology. From a growth perspective, we have some of those other specialty areas growing more rapidly than oncology, but it's off of a very small base. Oncology continues to be the main driver of our performance in specialty, and our bullish remarks regarding our growth in specialty is driven by our success in the oncology portfolio of our business, on a combined basis: Both the work we're doing on the network to grow the number of physicians in US Oncology; in our distribution platform out to oncology and other specialties; and clearly in some of the work that we're doing with manufacturers on the clinical services, and the data work that we're doing, really is all-encompassing. But we're pleased with the progress we're making in specialty, and it's an important part of our continued performance.

Okay. And then just one follow-up on the Rite Aid, which you talked about the contribution to OneStop. I mean, obviously, Rite Aid very publicly attributed their improved outlook to their expanded relationship with McKesson. Is kind of the proof of concept that we're seeing in Rite Aid starting to resonate with some of your other large retail clients that are not buying the bulk of their generics from you?

Well, we certainly think so. And I think the best example would be the success in our relationship with Omnicare, and not only renewing that partnership, but getting them to work with us and source through us their generic portfolio. I think Rite Aid played a role in that as a great reference point relative to our success. And I think as Rite Aid and others continue to say McKesson is the best alternative, frankly, along with other industry players that are beginning to turn to wholesaling as the source of product that they otherwise would have purchased direct, I think is a continued reinforcement of the power that wholesaling brings to the industry, both in terms of our purchasing and sourcing capabilities, but also frankly, our ability to use capital efficiently and our logistics expertise. And so there are several benefits why customers -- McKesson customers are turning to us and saying that we'd like to expand our existing relationship beyond brands into the generic portfolio. And we're optimistic about that.

Our next question comes from Robert Jones with Goldman Sachs.

John, I just wanted to go back to the comments around the pull-forward you saw this quarter. And I feel like we've heard this from time to time from you and your competitors. I mean, is this just seeing pricing coming in ahead of your internal expectations? Or is it actually something more contractual?

Well, once again, I can't speak for the industry or our competitors. But related to McKesson's work with manufacturers, particularly those that we have a contractual relationship with, we have great visibility to the amount of income we might earn from those relationships over time. The methods by which we earn that income and the timing is not always easy for us to forecast. And that's why we don't frankly provide quarterly guidance because we're not necessarily always certain about when those price increases might fall. And that was really what we were speaking about here relative to the pull-forward. We know the total amount we're going to get and then we know if we get a bunch of it in the third quarter, that it's not going to come again in the fourth quarter. And clearly, there's a portion of our income with branded manufacturers that's still earned outside of these relationships. But I would say that the large portion of what we realized here is -- was totally visible to us and is just a movement from one quarter to the next.

Got it. That answers the question. And then I guess, just the follow-up I have was around biosimilars. That's something the industry has been talking about for years. Now it seems like we have a feel on the near-term horizon with Remicade and Neupogen. Can you maybe just remind us how you see the economics playing out for McKesson? Is your expectation that as we see biosimilars, and these 2 specifically, come to the market, that the wholesalers will be able to leverage their value? Or could these maybe end up looking more similar to additional branded launches?

Well, I think it's difficult to -- once again, to make sort of an industry call. I do think that McKesson's position is unique as it relates particularly to cancer drugs, given our position with US Oncology and our network. We obviously don't own those physicians but we do partner closely with them. And as I discussed in my prepared remarks, our understanding of the clinical work that's necessary to bring a branded drug to market and take it to the various phases of clinical trial should be helpful as people begin to prove that the biosimilars have an equivalent outcome for the patient as the product that it might be replacing. And so I think that, that resource is unique to McKesson, and I do think our ability to use that resource to build value for the manufacturers that are entering this space will be helpful for us. It's probably too early to quantify when and what might occur as a result of this. I just wanted to point out the differentiation that we bring to the business.

Our next question comes from Steven Valiquette with UBS.

I guess kind of looking back through time. The McKesson fiscal fourth quarter EPS results have been up sequentially versus fiscal 3Q, like every year for the past 8 years or so, potentially even further back from that, except for the fact that my model doesn't go back, so I can't analyze it further on the fly. But really the question is, I guess, is the pull-forward of the brand inflation economics really that material to drive this unique cadence this fiscal year? Or again, maybe I missed it, were there 1 or 2 other big factors that might be driving the EPS down sequentially besides just that brand inflation? I know you mentioned a little bit about Celesio profits staying a little bit lower. But I just want to make sure I didn't miss any other key variables there.

Yes. I think it is a little bit more complicated this Q4 sequentially. We have this branded pull-forward item that John has just been discussing. We also have the tax rate effect between Q3, which was particularly low, and Q4. And then, of course, we also have a little bit higher FX headwind than we were expecting 90 days ago when we were on the call. And then we've also given you something of a sense around both of the DS margins and how they would be driving relative to this quite high DS revenue growth. And then we've also given you a sense of the TS revenue situation as well for the full year. So I think those are really the key drivers that will be relevant for us in Q4 and drive the sequential pattern that you're referring to.

We'll take our next question from Eric Percher with Barclays.

So given that you have operational control and you're expecting $1.8 billion in cash flow in the coming quarter, James, could you help us understand, are there any barriers from preventing you from reaccelerating putting cash to work? And how do you think about the minimum cash balance? Do you consider the noncontrolling interest? I know last quarter, you mentioned debt maturities. And I imagine there's a chance you could end up with a inefficient balance sheet given that noncontrolling interest could extend for a long period of time. And I know you have the ability to refinance and grow via -- or de-lever via EBITDA growth. So how do you account for those items?

Yes well, you're right in that we certainly have to be ready for those minority Celesio shareholders to put their shares to us. So I talked a lot on the call about the accounting, but in terms of usage of cash, we have to be ready for them to put their shares to us. And directionally, that's an amount of money of the order of $1.5 billion. And then also, as you mentioned in your question, we have debt maturities in fiscal '16 that will be appreciably larger than what we've seen in recent years, so again, about $1.5 billion coming due in fiscal '16. All of that said -- and certainly, there's a clear commitment to our ongoing investment-grade credit ratings here, all of that said, there's no change philosophically from the portfolio approach to capital allocation that McKesson has had for many years. And that portfolio is internal capital expenditure, M&A, dividends and share buybacks. And we do certainly want to emphasize the internal CapEx and the M&A as ways in which we can potentially drive further cash flow growth in the years that we think will be valuable to our shareholders. Certainly, in the 1.25 years that I've been here, I've been impressed as I've inspected the long-term track record of McKesson's M&A. I think McKesson has a terrific record around driving value through M&A. And so we'd want to have some capacity to enter into M&A should attractive opportunities come along, while we're in this de-levering period.

And do you view de-levering as it must come via a reduction in the debt level? Or will growth in EBITDA play a role?

Well, I think it will be both. I think it will be us paying down maturities, as well as consistent growth in EBITDA in the coming years.

Our next question comes from Robert Willoughby with Bank of America Merrill Lynch.

John or James, do you expect Celesio here to grow sequentially from this point? And what actually did drive the slightly lower profits for the business this past quarter?

Well, I think that the -- Celesio's a tale of many different markets. And so I think that depending on the market and whether we're talking about wholesaling or retailing, we do obviously expect growth in our businesses at market levels or above. There are certain markets like Brazil and France that we are a little more uncertain of relative to what kind of growth we're going to expect and certainly in France, given some of the reimbursement pressures that they face. Germany's been a troubled business for us, but we do see some signs of stability there and good growth from a revenue perspective. And clearly, the U.K., on both wholesale and retailing, has been a very positive story for us. So -- and I guess, we were pleased with the growth that Celesio's delivered from a revenue perspective this quarter and I think we would expect that business to continue to grow at or above market levels. And from a market perspective, James?

Well, I was just going to add, our experience thus far in fiscal '15 has been a stronger first half than a second half. And while we're only just really still in the middle of our FY '16 planning exercise, directionally, I wouldn't be surprised to see that continuing into the future.

Okay. And just margin-wise, just various challenges across various markets but nothing specific?

Well, I think the margin side of Celesio will be driven by the experience of Brazil and France in particular. Again, the U.K., we're seeing strong performance and we're somewhat encouraged by the situation in Germany that seems to be seeing some stability.

Our next question comes from Eric Coldwell with Robert W. Baird. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Well Robert just knocked off my question so I'll just ask a separate one that's of lesser importance. But, John, you mentioned -- you always like to mention a small business in the company that's doing well. And this time, you spent a little extra time in prepared remarks talking about US Oncology and the CRO services businesses. I'm curious if there was anything specific around that, that drove the additional attention this time related to the market or areas where you're investing and things of that sort? And I appreciate it.

Well, I think you're -- the question is a good one. Our focus really is not material from a financial perspective on what we do on the CRO business related to what we get paid to do those clinical trials. It's probably more relevant, our position with the manufacturers and the import that we have in the network to those manufacturers relative to working with them about products, particularly early in the community-oncology space. I would say that there's a lot more clinical trial work done obviously in these big universities settings when they can go to a single enterprise to get a bunch of work done. But there's really no other aggregation of community oncologists where they're going to have a single enterprise approach and pick up so many different markets and so many different types of doctors. So I think that we're heavily focused on making sure that in the portfolio of things we do for manufacturers in all of our businesses, that we continue to add value in a significant way and find ways to differentiate what we do.

Our next question comes from Ross Muken with Evercore ISI.

So I just wanted to quickly touch on the Tech Solutions business. It's been a sort of long winding road the last few years. And obviously, you've made a number of decisions to kind of restructure and revamp the business. As we're sort of exiting the year, I'm looking for more qualitative not quantitative, but how do you feel like the portfolio now is kind of taking shape? And I guess as you think about areas to either strengthen or whether or not there's even anything left that's small, left to sort of maybe not divest but deemphasize, how do you feel like you need to kind of continue evolve that asset to be a sort of net contributor to the business on an EBIT growth basis going forward?

Well, we're pleased with the performance of that business, it's basically in line with what we had anticipated this year, given that we had talked about that we were going to and have prepared the portfolio to focus on those businesses where we felt we had an opportunity to grow. And in particular, took out a business or 2 that produced no earnings. And part of what you've seen is great margin expansion as a result of that focus and attention. The businesses that are performing well there are businesses that we've had for a long time and that are continuing to modify their models so we can create a recurring revenue stream. And I would say the businesses that are flat or struggling are those that have either been replaced in the market with other priorities that people are spending on, other things that they have to buy and not buy some of our products that they'll have to come back around to later, or businesses where a transition's underway from a technology perspective. So I think we are still in middle of the game relative to the transition between Horizon and Paragon, which will be ongoing, which is a bit of a headwind as we think going forward. But we're also trying to invest in front of what we think will be a buy cycle for products that will help customers understand data better to make better decisions to take on risk and to follow the patient in a more longitudinal way. So there's a bunch of interesting places that we're placing bets, including CommonWell Health, that we think will pay off. But generally steady as she goes is the way we think about it at this point.

We'll take our next question from Charles Rhyee with Cowen & Company.

Maybe if I can jump onto Ross' question a little bit, expand if you could, John. If we were to look at this business a few years out from now, I know in the past and today as well, you talk about some of the strengths, particularly interoperability and RelayHealth -- the assets that were RelayHealth. What do you think the mix of this business will look like? And as you kind of wind down some of the other legacy businesses, how much longer do you think that will take for you?

Well I think that it's -- the question is difficult to answer given the prioritization our customers place on some of these activities. An example would be the significant amount of business we have in the payer space and our ability to focus our customers on spending against the next opportunity to optimize their performance as opposed to spending against issues that they have to deal with either from a regulatory perspective or a security perspective, et cetera. So our customers' priorities sometimes don't necessarily match where we're well positioned from a product portfolio perspective. I would say though that as you think out 2 or 3 years, the EMR space and the transition away from Horizon will be more complete or complete, and we'll see more results, we think, in terms of this pay-for-performance priority. I mentioned that HHS and others believe that the market has to move more towards a value-based reimbursement methodology. That's going to require additional investment.

And is that coming from sort of more through the trained up spaces, really from your payer solutions business, as well as sort of the RelayHealth business?

Well I think we're well positioned in the connectivity spaces because those transactions are already flowing through our businesses and those transactions are well underway and we are helping our customers do things more efficiently with more knowledge as a result of connectivity and interoperability. I think it's the places where folks can delay their purchasing decisions that we experience the volatility in our base. And most of our businesses today that are ahead of plan are ahead of plan because of volumes related to transactions. And most of the businesses that are behind their plans in our technology suite are behind not because customers have chosen somebody else's solution, they're behind because the buy decision has been delayed because there's other priorities for the customer, either from a capital deployment perspective or other priorities from a workload perspective for their IT groups to focus on other things other than buying a piece of software that might have a great return but they just don't have the ability to do it given that the priorities are someplace else. So I think that that's why this business is a little bit difficult to forecast because of some of those nuances that don't frankly exist in our distribution businesses where, unless you lose a large customer, you can count on the volume being there the next year, and it's just a question of maintaining that satisfaction level of the customers to continue to grow the business.

Our last question today comes from Garen Sarafian with Citi Research.

The first question was a quick follow-up bringing it back to procurement. I know it's only been a short while since obtaining operational control. But knowing Paul and his team, I suspect they've already had a healthy dose of meetings with the manufacturer. So could you give us any specifics as to the progress you've made there and maybe some broad strokes as to how the conversations are going? And maybe even if and how you shifted your approach to the market as you're receiving early feedback?

Well, we are very early in this process. We couldn't really begin this dialogue until we had operational control. That didn't happen until middle of December. And I would say that our early conversations with manufacturers have been very positive, and we've made very nice progress. And I think most of the manufacturers in the world have an interest in having a dialogue with McKesson because of the value that we bring and the customers that have entrusted us with their business and their volumes to go to the marketplace in a unified way. So I do feel positive about where we're headed. I think it's early to try to quantify timing or value. But I think from a first-step perspective, we're on track with where we thought we would be at this point post-domination.

Fair enough. I had to try on that one. And then just a quick follow-up. James, in your prepared remarks, you mentioned in the Technology segment that there were some larger client delays due to competing projects, I believe it was. So could you elaborate on that a little bit? And what gives you confidence that it'll come back?

Yes. It's really just what John was expanding on in one of his last comments there. We have seen in some of the technology businesses a delay in some of the bookings that we continue to expect to come through. But from the customers' perspective, it's a bit of a sequencing, a bit of a prioritization issue. So yes, I would expect to get that business. It's just a matter of precisely when.

Well. Thank you, operator, and thank you, all, for being on the call today and for your time. I'm pleased with our solid results in the third quarter, and I'm excited about the opportunities we see across our business to deliver exceptional value to our customers. I'm now going to hand the call back to Erin for her review of upcoming events for the financial community. Erin?

Thank you, John. On March 3, we will present at the Cowen Healthcare Conference in Boston, and we will release fourth quarter earnings results in May. Thank you and goodbye.

Thank you for joining today's conference call. You may now disconnect. Have a good day.