McKesson Corporation
Q4 2022 Earnings Call Transcript

Published: 5 May 2022

[Operator:]

Welcome to McKesson's Fourth Quarter Fiscal 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. At this time, I would like to turn the call over to Rachel Rodriguez, VP of Investor Relations. Please go ahead.

[Rachel Rodriguez:]

Thank you, operator. Good afternoon, and welcome, everyone, to McKesson's fourth quarter fiscal 2022 earnings call. Today I’m joined by Brian Tyler, our Chief Executive Officer; and Britt Vitalone, our Chief Financial Officer. Brian will lead off, followed by Britt, and then we will move to a question-and-answer session. Today’s discussion will include forward-looking statements such as forecasts about McKesson’s operations and future results. Please refer to the cautionary statements in today’s earnings release and presentation slides available on our website at investor.mckesson.com and to the Risk Factors section of our periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward-looking statements. Information about non-GAAP financial measures that we will discuss during this webcast, including a reconciliation of these measures to GAAP results, can be found in today’s earnings release and presentation slides. The presentation slides also include a summary of our results for the quarter and updated guidance assumptions. With that, let me turn it over to Brian.

[Brian Tyler:]

Thank you, Rachel, and good afternoon, everybody. Today, we announced our fourth quarter results, marking a solid finish to our strong fiscal 2022. Thanks to the dedication and excellent execution from Team McKesson, we made outstanding progress against our company priorities and in our transformation to a diversified health care services company. We achieved 31% growth in adjusted earnings per diluted share when excluding the impacts attributable to COVID-19 related items and net gains associated with McKesson Ventures equity investments. We have good momentum across the enterprise. We saw strength in our core distribution business and our strategic growth pillars of oncology and biopharma services. We remain focused on the company priorities, which are foundational to our sustainable long-term growth and shareholder value creation. My remarks today will be centered around these themes. Before I jump into company priorities, I do want to talk briefly about the recent developments in opioid litigation. In February, we announced the approval of the proposed opioid settlement agreement. 46 of the 49 eligible states and the District of Columbia and all eligible territories joined the settlement, representing more than 98% of the eligible political subdivisions that have brought opioid related suits against us as calculated by population under the agreement. The resolution delivers much needed relief for the impacted communities. It will collectively provide thousands of communities across the United States approximately $19.5 billion over 18 years. The agreement became effective on April 2nd. The approval of the settlement agreement also removed a significant portion of operational and financial uncertainty in the business, allowing us to redirect resources for more focused execution on our company strategies. In addition to the 46 states participating in the previously announced agreement, on April 4th, an agreement was reached in the Alabama matter, in which McKesson will pay $141 million and an additional $33 million in attorney's fees and costs to resolve the opioid related claims of the State of Alabama and its subdivisions. On May 3rd, an agreement was also reached in the Washington matter, in which McKesson will pay $197 million, consistent with the State of Washington's allocation under the previously announced comprehensive settlement framework, as well as certain additional attorney fees and costs. This resolution will result in the settlement of the state of Washington and its litigating subdivisions. That will bring the total number of states settling opioid-related claims with McKesson to 48 of 49 eligible states and the District of Columbia. As a company, we remain deeply concerned about the impact the opioid epidemic is having on individuals, on families and communities across the nation, and we continue to be committed to be part of the solution. This includes our controlled substance monitoring programs, advanced customer purchasing analytics and many, many other initiatives. Let me now take you through our company priorities and the progress we made in fiscal 2022. We are excited about these initiatives, as we continue to deliver strong results and improve our strength as an organization. After our fiscal 2022 discussion, I'll walk you through each of the operating segments and lay out how they are positioned for growth, as we head into fiscal 2023. For the last several years, the enterprise has centered its strategic, its operational and financial decisions around our set of company priorities and the results have been outstanding. We fundamentally changed the trajectory of the company from declining financial performance to sustainable growth across the business. Through the focused execution of the priorities, we improved efficiency, we defined our differentiated and strong market positions, and we established the right to play and win in oncology and the biopharma services markets. Now let me briefly walk you through the progress on each of them. I'll start with our first priority, which is our focus on people and culture, our ICARE values, our enterprise-first mindset and our commitment to Team McKesson, our commitment to each other, were critical to successfully navigating the last few years. We are committed to being the best place to work in health care, and our best talent strategy is accelerating our business momentum. In fiscal 2022, we made investments in our workforce including the frontline workers through additional labor investments in the US Pharmaceutical and Medical-Surgical segments in the back half of our fiscal year. Our company culture, our purpose, our mission and the investments we've made in our teams underpin our performance as a business. Our people and culture strategy is integrated with our continued focus on ESG initiatives, ensuring we not only do good business, but we do business the right way. As an impact-driven organization, we embrace our responsibility to enable lasting changes in the communities we serve. Over the past year, we made great progress in many areas, particularly around advancing access to care, health equity and climate action for health. To promote diversity, equity and inclusion, we have set specific and measurable goals to increase representation of both women and people of color amongst our leadership ranks. We released our employment information report, including our EEO-1 data, to improve transparency and accountability and equal employment opportunities. We also launched company-wide inclusion training, fostering positive behaviors and teaching ways to address bias in the workplace. Our commitment to diversity starts with our Board as evidenced by the recent successful completion of our Board refreshment. In April, we announced the election of Roy Dunbar as the new Director of the Board. Mr. Dunbar brings decades of experience in technology, operations and health care and will be instrumental in guiding the company's strategic priorities. In addition to the appointment of Mr. Dunbar, in fiscal 2022, we elected a new independent chair of the Board and introduced three other new board members with diverse backgrounds and experience. Women and people of color now represent 50% of our Board of Directors, and we look forward to benefiting from their leadership and their stewardship. Moving to our second priority, which is driving sustainable core growth. At the core of our offering is the Pharmaceutical and Medical-Surgical distribution solutions. Building upon the momentum in fiscal 2022, we continue to innovate and invest in our distribution assets and capabilities. Some of the latest advancements over the past year include automated picking and packing solutions and robotics, which help us improve productivity, so we can pick more accurately, pack medications faster and ultimately serve our customers better. We're also expanding the reach of our core business by entering adjacent markets while maintaining operational excellence. A great example of this is our patient home delivery service. Leveraging our scale distribution network, we help our partners deliver medical-surgical products directly to patients' homes nationwide. With an increasing demand in virtual and home care, we've seen significant growth in this channel in the past few years. Our best-in-class customer service and deep medical-surgical products enables us to capture the market opportunity, ensuring the right product to the right patient at the right time. We also continued to partner closely with the US government in its COVID-19 response effort. It's been more than a year now since we started shipping the COVID-19 vaccine and ancillary supplies. Through March 31, we have successfully distributed over 380 million Moderna and Johnson & Johnson COVID-19 vaccines to administration sites across the United States and in support of the US government's international donation mission. Although the contract with the US government to serve as a centralized distributor is expected to end in July, this experience has been a strong testimony to our vast and scaled supply chain capabilities. And I am incredibly proud of the way our employees rose to the challenges brought on by the pandemic through our focus on meeting the needs of the healthcare community. In early fiscal 2022, we announced our intent to exit the European market, which aligns with our company priority to streamline and simplify the business. Over the past 12 months, we've made significant progress as we have successfully entered into agreements to sell the operations in 10 of the 12 countries. We've completed the divestiture of the Austria and UK businesses, and our German joint venture with Walgreens Boots Alliance, bringing all the in-process transactions to closure and exploring strategic alternatives for the remaining countries is a top priority in fiscal 2023. The actions we're taking in Europe build upon our deliberate efforts over the past years to maximize the organization's operational efficiency and focus our resources on the highest growth opportunities. The last company priority that we're excited about is the expansion of our oncology and biopharma services ecosystem. At our Investor Day in December 2021, we shared details about our differentiated assets and capabilities in these two areas. We believe that these ecosystems can help solve complicated problems, and importantly, improve patients' lives. The goal to help ease the frictions and eliminate inefficiencies in the healthcare system and to improve patients' lives is what motivates us continuously to innovate and to execute. Our biopharma ecosystem represents a scaled network of assets and capabilities that are highly differentiated. Within the ecosystem, we're expanding the reach of our products and services that aim to improve access, affordability and adherence. In the past year, we helped patients save more than $6 billion on branded and specialty medications. We helped prevent more than 9 million prescriptions from being abandoned due to affordability challenges, and we helped patients act their medicine more than 67 million times. We created an ecosystem that's more efficient and more valuable to the customers and patients and each of the pieces would be standing alone. The cohesive business strategy and coordinated go-to-market solutions are both critical enabling continued growth in this segment. In our oncology ecosystem, we're strategically positioned to improve cancer care with a range of services and solutions. Our distribution and GPO capabilities continue to provide patients access to life-saving drugs, including biosimilars. Combined with our reach through the US oncology network, we help promote awareness and bring more affordable treatment options to both providers and patients. A great example is our US oncology research, which continues to play a central role in accelerating research and science. As one of the largest community based oncology research programs, it has contributed to more than 100 FDA approved cancer therapies. Last year, nearly 900 physicians actively accrued patients to clinical trial. And through Ontada, we're leveraging the reach and resources across the ecosystem to generate real-world data and evidence. We've published more than 200 real-world studies and leading industry publications for over 70 oncology indications. We are now serving the top 15 global life sciences companies, providing them valuable services to accelerate research and commercialization. As I reflect on our progress against the company priorities, I am very excited to see the meaningful impact it's brought to our business, our customers and to patients. The strategy is working and will continue McKesson's growth journey into fiscal 2023. I'm confident in our ability to continuously execute, innovate and deliver sustainable profit growth for the long-term. Now let me turn to the performance over the past 12 months and how we're positioned for success heading into fiscal 2023. First, I want to share an exciting update on our ESG initiatives. At the beginning of fiscal 2022, we committed to set science-based greenhouse gas reduction targets. We have already submitted our targets to the Science Based Targets initiative for official validation. Through initiatives across operations and supply chain management, we're setting measurable and specific goals to reduce both Scope 1 and Scope 2 emissions, building a more sustainable business, and ultimately, serving the health of patients and communities. Next, let me provide some observations on volume and utilization trends. We're encouraged by the prescription volume and medical visit levels across the business. We've seen continued improvement in pharmaceutical prescription volume, oncology visits and primary care patient visits. While recovery in certain markets like extended care may be lagging, we are seeing other markets recover close to pre-COVID levels. We anticipate the positive trends to continue in fiscal 2023. In US Pharmaceutical, we saw stability in the distribution fundamentals reflected in solid growth in adjusted operating profit in fiscal 2022. Our ability to drive sustainable growth in this business derives from a few factors. As I mentioned earlier, we continue to invest in the core distribution assets expanding and strengthening our capabilities and unlocking new efficiencies in the business. On the generics and branded front, the fundamentals of the pricing environment remains stable and generally track in line with our expectations. Our balanced approach of managing a broad portfolio of pharmaceutical products allows us to strengthen our competitive position and enables us to be resilient and flexible to market movements. We remain focused on the investment and expansion of our oncology ecosystem. We're pleased with the growth momentum across our oncology assets from Provider Solutions in the US oncology network to our data and our insights business Ontada. They are critical pieces to the long-term growth of this segment, and we're excited to capture the market opportunity and further our progress in fiscal 2023. In Prescription Technology Solutions, we saw another year of adjusted operating profit growth, driven by expansion of our product offerings, as we bring more brands onto the platform and increase transaction volume as the market recovered. A good example of growth in this segment is our access for more patients, or AMP solution, which was developed and launched about three years ago. The solution's focused on automating benefit verification and hub enrollments for patients. And in fiscal 2022, we saw accelerated growth with 25% increase in the number of brands on the program. It has contributed to the overall growth across the enterprise and more importantly, help patients get on therapies up to eight days faster and stay on therapies longer, driving better health outcomes. We anticipate innovations like this will continue to fuel growth and strengthen our differentiated product offerings. Our future innovations and investments will be centered around expanding the reach of our current products into adjacent markets, such as specialty brands and medical benefits. We continue to invest into the future growth of this segment. Moving on to Medical-Surgical, which has performed exceedingly well this past year. Excluding the benefit from COVID-19 items, the underlying Medical-Surgical Distribution business grew at a double-digit rate for adjusted operating profit. The lab business that we highlighted before is just one of the drivers for this outstanding growth trajectory. Recovery in the primary care market and our expansion of selling prescription drugs into the non-acute channel also contributed to the segment. Looking ahead, as a leader in the alternate site market, we believe that this segment is well positioned, as more site of care moves into the communities. Our experience and our relationships in every channel and setting of the alternate site markets enable us to capture this growth opportunity in the years ahead. In the International segment, our strategy and commitment to the Canadian operations remains unchanged. McKesson Canada is a leader in pharmaceutical distribution in the country and has a portfolio of valuable assets, including the retail banner groups Rexall, specialty pharmacies and digital offerings such as Well.ca. We will continue to build and grow this business. In summary, we're extremely pleased with the progress we've made in fiscal 2022 to further our transformation into a diversified health care services company. Looking ahead, to our fiscal 2023, our guidance of $22.90 to $23.60 of adjusted earnings per diluted share includes organic growth of the underlying businesses, improved operating leverage and a balanced approach to capital deployment. Excluding the contribution from COVID-19-related items in both fiscal 2023 and fiscal 2022, and net gains from McKesson Ventures in fiscal 2022, we expect adjusted earnings per diluted share to grow 9% to 14% year-over-year. We expect the adjusted operating profit growth in our US Pharmaceutical, Prescription Technology and Medical-Surgical segments to be in line or above the long-term financial framework we laid out at our Investor Day last December. We anticipate the market to remain dynamic, particularly as it relates to supply chain and inflation. We're confident in the resiliency of our business model and our ability to minimize any potential impacts. Our fiscal 2023 guidance does not assume a material headwind from supply chain disruption or sustained price inflation. Britt will walk you through the additional details that we've included in the outlook. As we look ahead to fiscal 2023 we're excited and energized to build on the momentum and to capitalize on our strong market position. We're advancing our transformation to a diversified healthcare services company, extending our long tradition of innovation and evolving our business while reaffirming our strong commitment to addressing the changing needs of our customers, their patients and the broader healthcare industry. Our success in building differentiated assets and capabilities positions us well to support better health outcomes and to accelerate profitability and healthy growth for the company. I want to conclude my remarks by acknowledging our employees, who are dedicated to bringing insight products and services to our customers and partners. Thanks to their execution and their commitment to McKesson and to each other, we're improving care in every setting, one product, one partner and one patient at a time. We are truly enabling better health for all. Thank you for your time this afternoon. And now I'm going to hand it over to Britt.

[Britt Vitalone:]

Thank you, Brian, and good afternoon. Today, I'll discuss our fourth quarter and full year fiscal 2022 results, then I'll outline our fiscal 2023 guidance. At our Investor Day in December, we discussed the transformation underway at McKesson. Distribution remains a core part of our company. However, we continue to advance and grow as a diversified health care services company, built on differentiated assets and strategies we're executing, delivering sustainable earnings growth across our businesses. As we articulated then, our confidence is based on three interconnected factors

[Operator:]

Thank you. And our first question comes from Michael Cherny with Bank of America.

[Michael Cherny:]

Good afternoon and thanks for obviously a ton of details. So I want to think about just the cadence of the year, if I can, a little bridge, just to make sure. Should we assume, based on the timing of the CDC contract, that pharma growth should be heavier in the first quarter of the year? And how should we think about any other components of cadence and how it should filter through the year relative to some of the more identifiable items like the COVID benefits and other components?

[Britt Vitalone:]

Yes. Thanks for that question, Mike. As we didn't really outline it, we don't talk about quarterly guidance, but I can indicate for you that on a consolidated basis, what we would expect is that our earnings growth will be heavier in the second half of the year as opposed to the first half of the year. As I laid out in my comments, we have less contribution from COVID related items in fiscal 2023 than we did in fiscal 2022. And in fact, in all cases, across both Pharma and our Medical segment, we have declining COVID related contribution. So what we do expect is that we would indicate to you expect a heavier proportion of earnings in the second half of the year, a modestly heavier proportion in the second half of the year than the first half.

[Rachel Rodriguez:]

Next question, please.

[Operator:]

We'll take our next question from Eric Percher with Nephron Research. Please go ahead.

[Eric Percher:]

Thank you. Brian and Britt, kind of, standard question on initial guidance. As you've looked at your budget for the year, I'd be interested to hear what the risks and opportunities look like, recognizing you have a $0.70 range on $23 and potentially $0.40 of that attributable to COVID. So you're feeling that there's relatively little variance and what are the factors that would drive you high or low?

[Britt Vitalone:]

Thanks for the question, Eric. I'll start, and then certainly, Brian can add on. I think one thing for sure as we think about this is as we talked about the variability that we've seen in COVID and the pace of COVID is certainly one that we'll watch for and that certainly can go up or down, particularly in the case of COVID tests. So that could be a risk. It could be a positive or a negative. Clearly, as we've talked about with the macro environment, we are pleased with the fact that we're seeing prescription volumes continue to increase. And as the economy continues to -- or I should say, if patients continue to be more mobile as COVID restrictions continue to ease, that certainly is an opportunity for us to see prescription volumes continue to improve, not only in our Pharma business, but really across, as I talked about, in our Prescription Technology business as well. We certainly have the opportunity to deploy capital. We've laid out for you our assumptions around capital deployment, but we have a lot of flexibility and a good financial framework. And the other way I would point out to you is really the timing around our European divestitures. We've laid out for you that we would expect the transaction with the Phoenix Group to be in the second half of the year, but clearly, that timing could move as we continue to move through that transaction.

[Rachel Rodriguez:]

Next question, please.

[Operator:]

Our next question comes from Charles Rhyee with Cowen.

[Charles Rhyee:]

Thanks for taking the question. Britt, you talked about how your COVID related businesses really tracks with the incidence of COVID in the country. We are seeing cases rise, at least to date, that's what the data seems to be showing. But at the same time, right, it seems like there's overall less testing sort of a less emphasis. Maybe you can talk about maybe trends that you're seeing currently? And what does an endemic phase of COVID look like, or how are you guys thinking about that as we think -- if we move into an endemic phase for COVID? Thanks.

[Brian Tyler:]

Thanks, Charles. It's -- obviously, it's been a little bit hard to predict over the last two years. We saw our last spike in testing really hit us in January of this year. And then we've seen COVID test kit volumes fall off pretty significantly since then. There is a new variant circulating. Initial indications are as probably the same medical profile as the previous variant. But the wild card will be patient behavior. Do people get into routine testing? Do they feel the need to routinely test? Do employers test, as they bring people back? And that's a little bit difficult to forecast. So what we've given you is a guide in FY 2023, based on our most -- our best and current view of the market.

[Britt Vitalone:]

And, Charles, maybe just getting back to the question that Eric asked as we think over the year, things that could get us to the higher or the low end of the range. Clearly, COVID test has a lot of variability in that. We've given you our best estimate based on the trends that we've seen, which is really that, as Brian talked about, that declining level of cases in testing. But, certainly, if a variant does come back and cases begin to rise again, that would be something that we would watch for. And we would anticipate that COVID testing would follow the trajectory of cases.

[Rachel Rodriguez:]

Next question, please?

[Operator:]

Thank you. Our next question comes from Lisa Gill with JPMorgan. Ms. Gill, please check your mute button on your…

[Brian Tyler:]

Hi, Lisa. Are you there?

[Lisa Gill:]

Sorry, I’m here. Thank you very much for all the detail. I just want to understand a couple of things, as we think about the guidance. One, I know you made a comment earlier on when we think about supply chain and inflation that you have some things built into your guidance. You talked about the inflation on the side of wage inflation. One, could you carry that through into 2023 on a permanent basis? And then secondly, if I think about your medical supply business, you have historically had a private label product that was coming, if I remember correctly, from Asia. So has there been any impact due to supply constraints on that side of the business?

[Brian Tyler:]

Thanks for the question. I'll kick it off and Britt can add whatever additional comments he'd like. I mean, starting on the labor cost front. It's obviously been a pretty dynamic labor market, and we don't actually think of it as a single market. We think of it as micro markets around where we have locations and facilities. We did make investments largely into the frontline teams in our Medical and our Pharmaceutical business in the back half of our last fiscal year. We've talked about that, and we have contemplated some labor investments in our FY 2023 outlook, based on the status of the market today and the behaviors and the indicators that we see today. That’s something we’ll continue to track. I mean, I think, McKesson is a great place to work. We have a really strong employee value proposition that includes competitive wages, the benefits and development and career progression and mean -- and work that has really meaning and purpose behind it. So I think we feel good about where we stand as we enter the year, but it's certainly -- the last several months have been, labor markets like most of us have not seen, so we'll continue to monitor and track that closely. On the supply chain front, I think our supply chains have been remarkably resilient in Medical and Pharmaceutical over the many, many twists of the last two years, I would say that they continue to be resilient. We would anticipate very modest levels of disruption and cost inflation in FY 2023. Our private brand program, as you might recall, we don't own physical plant and equipment and manufacture, we source. And so our teams have been very aggressively thinking about expanding and broadening and rotating our sources of supply. And thus far, we've been able to maintain very good inventory positions.

[Britt Vitalone:]

And maybe just Lisa, I'd just add on, we have a very comprehensive sourcing strategy and we source our products really in a very diverse way across many different countries. And one of the things that we're really proud about and focused on is our approach to responsible and sustainable sourcing. And we've really taken a lot of actions along those lines to also diversify our partners across the products that we serve. So we feel like we have really good strong sourcing program in place, and we feel well-positioned.

[Rachel Rodriguez:]

Next question please.

[Operator:]

And our next question comes from Steven Valiquette with Barclays.

[Steven Valiquette:]

Thanks. Good afternoon everybody. So relative to our own EPS bridge we had built previously from FY 2022 to 2023, biggest source of upside from our view is the $0.85 to $1.15 EPS you still expect from the European assets. I guess in that piece, I was curious, too, is there any color on whether or not that will be heavily front-end loaded in the first quarter or two or maybe more evenly spread throughout the year? And then at the risk of maybe looking too far ahead, should we assume that all of that $0.85 to above $15 would essentially disappear in your fiscal 2024? Thanks.

[Britt Vitalone:]

Yeah, I'd say that the cadence would be very similar to what I gave you on a consolidated basis. Now we do expect that the transaction that we talked about with PHOENIX is going to close in the second half of fiscal 2023. So I guess it would be more first three quarters loaded than just half-and-half. As it relates to 2024, I think it’s little early to start talking about that. We've talked to you about the fact that Norway and Denmark are still two countries that we're evaluating opportunities for to fully exit this. It's too early to really talk about any transactions along those lines. And we still operate those businesses, and we’ll just continue to evaluate opportunities to exit that. But those are -- those continue to be countries that we operate in.

[Rachel Rodriguez:]

Next question please.

[Operator:]

Thank you. We’ll take our next question from Ricky Goldwasser with Morgan Stanley.

[Ricky Goldwasser:]

Yeah, hi. Good afternoon. So two clarification questions. So one, as we think about the European contribution, I think that's page 16 in your slide deck that $1.97. Is the take here is really that, that European contribution ultimately will be replaced by buybacks even for that, I think you have $0.85 to $1.15 in assets that you still own. But if you divest tender, we should think about this as replaceable with capital allocation through buybacks. And then similar to that, if we think about the cost inflation that's embedded in results. I think in the slides you talked about, if you adjust for COVID costs then distribution segment would have grown 2%. I think on the call, you said if you adjust for that, aim for higher rate in inflation, then you would have grown 4%. So should we think about that 2% difference is the cost and inflation? Is this something that we can think about as we try to quantify what it is embedded in your 2023 guidance?

[Britt Vitalone:]

Thanks for the questions, Ricky. Let me try to take those in order. Let me first talk about Europe. We've tried to lay out here for you as transparently as we could what the European contribution was in FY 2022. And then we talked about what we thought the operations would contribute in 2023. We fully intend to exit Europe. And what we've also said is that when we do that, the loss contribution from those earnings, we would replace with capital deployment, principally share, share buybacks. And we've tried to lay that out for you. And so, yes, the way we've laid it out for you is that you should think about Europe eventually going away and being replaced by capital deployment. As it relates to the comment on the US Pharmaceutical segment, let me break it up this way. When you think about excluding the COVID-related items, which, again, we've talked about those pretty transparently since the beginning, we had 2% growth year-over-year. We did talk about beginning on our second quarter earnings call that we were making additional investments into our US-based businesses to have continuity of service through labor expenses. That accounted for about 2% of the year-over-year impact in the US Pharmaceutical business in the fourth quarter. And so, I wanted just to make that comment. It's nothing different than we've talked about before. We talked about the contribution that we'll be making and the investment we'd be making about $0.20 for the year. That, for the US Pharmaceutical segment, was about 2% in the quarter. So that's why we called that out, just as a sort of a confirmation of what we've talked about previously.

[Rachel Rodriguez:]

Next question, please?

[Operator:]

Thank you. We'll take our next question from Kevin Caliendo with UBS.

[Kevin Caliendo:]

Thanks for taking my question. Just a lot of the margin changed the guidance and the change in margins across the segments can be explained by COVID. But when I look at, say, PTS and Medical-Surgical, is there anything else we should think about in terms of the mix or benefits? You've talked a little bit about what you expect on the pharma side. Is there anything in those two segments outside of COVID that we should be thinking about that might impact margins for 2023?

[Britt Vitalone:]

As we think about 2023, wouldn't think that there would be much change in terms of the mix within those two businesses. We're continuing to see good strength in our primary care business in the medical business. We expect that will continue into FY 2023. And in our RxTS business, I mean, we had strong growth on the revenue line, we had 26% growth in operating profit. So we had strong performance at the margin line as well. And we expect that our adherence and access programs will continue to have growth as we move into 2023. So I wouldn't guide you to any different mix in 2023 than we’ve seen in 2022.

[Rachel Rodriguez:]

Next question, please?

[Operator:]

Thank you. Our next question comes from Eric Coldwell with R.W. Baird.

[Eric Coldwell:]

Hi. Thank you. Good afternoon. Fairly simple one, I hope. Your competitor who reported today had $115 million of opioid expense last year, said that their expense next year would be down only modestly. You had $130 million expense, and you're saying it will be $40 million. That's a really big delta between the two companies for the same situation. Any sense on what the delta is between you two? Have you excluded the injunctive relief costs, the data, the tracking, the integrity costs that come with the program in this $40 million, or what might explain this substantial delta in opioid litigation expense? Thanks very much.

[Brian Tyler:]

I don't know that we can speak to the delta. We can speak to the guidance that we provided. As we look at the litigation, the litigation calendar, open issues that are ahead of us. This is our best view based on what we know today of what we would anticipate to spend and defending ourselves against these suits. And that number we provided was $40 million.

[Britt Vitalone:]

And as I pointed out, there are some factors that could drive that number in either direction. That could be the pace of any trials or trials themselves and any of the work that goes into any trials that do happen. So we've given you our best estimate based on our analysis of what remains. And again, as Brian said, it's really can't comment on how is somebody else is thinking about this.

[Brian Tyler:]

That is the legal expense. I mean that is $40 million for legal defense, right?

[Britt Vitalone:]

Consistent as it's been since we began reporting this to you three years ago.

[Rachel Rodriguez:]

Next question, please.

[Operator:]

Thank you. We'll take our next question from Elizabeth Anderson with Evercore ISI.

[Elizabeth Anderson:]

Hi, guys. Thanks so much for the question. I was wondering if you could talk about the relative contribution of pricing increases to the revenue growth in your three remaining segments and the outlook that you provided for 2023?

[Britt Vitalone:]

Yeah, thanks for the question. We didn't touch on that. We historically have talked about the environment around branded inflation and generic inflation. We don't see any change in our FY 2023 outlook to what we've seen in FY 2022. So we see relative stability in both branded price inflation. And from a generics perspective, we continue to see a stable but competitive environment that is supported by the strong sourcing operations that we have and our focus is on providing our customers, stability of supply, good pricing and our ability to do that through good sourcing and disciplined approach to the sell side. So from our perspective, as we look at the pricing environments around branded and generics, we see relative stability in 2023 compared to 2022.

[Rachel Rodriguez:]

Next question, please.

[Operator:]

Thank you. We’ll take our next question comes from George Hill with Deutsche Bank.

[George Hill:]

Hey good evening guys, and I appreciate you taking my question. I guess, Britt, I would ask if you could talk a little bit about inside of the Pharmaceutical segment, kind of, the difference between what's happening in the core wholesaling business versus the more manufacturer facing services businesses? And I guess, are they both performing in line and positively, or is there a meaningful divergence on how the -- what I would call the pharmacy facing business is performing versus the manufacturer facing business is performing?

[Britt Vitalone:]

Yeah. Let me start, and then certainly, Brian can add on to this. Our biopharma services, I think, as you've captured on manufacturer services, those businesses are captured in our Rx Solutions segment. And as we've talked about, that business continues to generate really good revenue, top line and profit growth. We're seeing more brands being added to our platforms. We're seeing good acceptance in the marketplace of our access and adherence solutions. In both of our businesses, as I talked about, we're seeing improved transaction volume from prescriptions. And that certainly is benefiting our Prescription Technology Solutions segment very well, both new and existing brand. So I'd say both of those businesses are benefiting from the macro factors of seeing improved transaction volumes. Clearly, the growth of our technology solutions in RXTS and our access and adherence solutions are seeing really good growth.

[Brian Tyler:]

Yeah. And I'd just say, we've created RxTS segment to give you visibility into how that business is performing, and we're quite pleased that both the core pharma and RxTS business. Our forward guide for FY 2023 is in line. And in the case of RxTS exceeding what we said in December, we thought was a long-run growth target. So we're very pleased with both those businesses and feel we're very well positioned.

[Brian Tyler:]

Okay. Well, thank you. Thanks for your patience. I know we ran a few minutes longer than we normally do. It's typical at a year-end or year kick-off call. I want to thank everyone for your time and for joining this call. We really appreciate your thoughtful questions, and certainly, your interest in McKesson. Thank you, Cody, for facilitating the call for us. Just to conclude, McKesson delivered a strong fiscal 2022 with double-digit adjusted operating profit growth and I am excited about the continued progress of our company priorities into fiscal 2023. I'm confident about our ability to deliver strong growth, solid financial results and shareholder value creation. Of course, it's all due to the people that make up Team McKesson across all areas of our business. I want to thank them for their hard work and their dedication to executing on our strategies, for living our culture and our values and bringing positive changes to our partners, our customers and the patients that we impact. Thanks, again, everybody. I hope you all have a terrific evening.

[Operator:]

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