McKesson Corporation
Q1 2020 Earnings Call Transcript

Published: 31 Jul 2019

[Operator:]

Good day, and welcome to the McKesson Q1 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Holly Weiss. Please go ahead.

[Holly Weiss:]

Thank you, Justin. Good afternoon, and welcome everyone to McKesson's first quarter fiscal 2020 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.

[Brian Tyler:]

Thank you, Holly, and thanks to everyone for joining us on our call today. We're please today to be able to report a strong start to our fiscal year 2020. For the first quarter, we achieved total company revenues in excess of $55 billion, and adjusted earnings per diluted share of $3.31, ahead of our original expectations. On our fourth quarter call, in May, I discussed that we were entering the fiscal year with positive momentum. And I feel really good about this underpinning our first quarter results. We're seeing healthy growth across many parts of our business, which is a direct result of the actions we have been and are taking to execute on our strategic imperatives, which are enabling us to become a more focused and efficient company. And our balance sheet remains strong, giving us the flexibility to deploy capital that can differentiate McKesson and create shareholder value. As a result of our first quarter performance, combined with our confidence in the business as we look ahead, we're raising our fiscal 2020 adjusted EPS guidance range to $14.00 to $14.60. This is from our previous range of $13.85 to $14.45. Now turning to the business, I'll summarize our first quarter results, and then turn the call over to Britt to elaborate. The U.S. Pharmaceutical and Specialty Solutions had a good start to the year, driven by our broad set of specialty biopharmaceutical capabilities focused on both providers and manufacturers. I'm particularly pleased as this demonstrates the progress we're making on one of our three key strategic imperatives. We continue to see biopharma dynamics that are trending in line with our annual guide of mid single-digit price increases on branded drugs. In addition, given our presence in the provider space and particularly oncology, where we are well positioned as biosimilars continue to become prevalent.

[Britt Vitalone:]

Thanks, Brian, and good afternoon. McKesson posted another solid quarter and strong start to fiscal 2020. Slides on reviewing with you this afternoon are posted to the Investors section of our website and include our full-year fiscal 2020 guidance assumptions. Today we reported first quarter adjusted earnings of $3.31 per diluted share ahead of our original expectations and we're raising the full-year fiscal '20 outlook by $0.15 to a range of $14 to $14.60 per diluted share from our previous outlook of $13.85 to $14.45 per diluted share. Let's move right to our first quarter results. Our first quarter adjusted earnings of $3.31 per diluted share were up 14% year-over-year driven by strong performance in the U.S. pharmaceutical and Specialty Solutions business, Medical-Surgical Solutions and our MRxTS businesses. A lower share count higher contribution from our equity investment in Change Healthcare, a one-time gain from investment activities and expense timing. These items were partially offset by the anticipated year-over-year increase in opioid litigation and technology costs which we outlined with our initial outlook in May. Also had a lower profit contribution from the Europe segment and a higher adjusted tax rate. Let me start with the details of our consolidated results, which can be found on slide four. Consolidated revenues for the quarter increased 6% year-over-year, primarily driven by growth in our U.S. Pharmaceutical and Specialty Solutions segment. Adjusted gross profit increased 2% year-over-year, mainly driven by a few key operational items. Within our Medical-Surgical business, the contribution from the MSD acquisition, which we have now lapped, and above market growth in pharmaceutical products, volume growth across our MRxTS offerings, and growth in our specialty provider solutions business within the U.S. Pharmaceutical and Specialty Solutions segment, these items were partially offset by foreign currency effects and lower retail pharmacy margins in the U.K. First quarter adjusted operating expenses increased 1% year-over-year partially driven by the acquisition of MSD in the prior year. Adjusted income from operations was $933 million for the quarter, 9% above the prior year. Interest expense was $56 million for the quarter, a decrease of 8% compared to the prior year primarily due to lower commercial paper balances.

[Operator:]

Thank you. And our first question comes from Lisa Gill with JP Morgan.

[Lisa Gill:]

Thanks very much, and good afternoon. Congratulations on a nice start to the year. Brian, I know that it just came out, you know, this new safe importation action plan, but just being in Canada, how realistic is this that the manufacturers are going to allow product to go to Canada, then come back to the U.S., and just given the size of the Canadian market. And what role do you think that McKesson can play as the largest distributor in Canada to make sure that, one, product that meant for Canada stays in Canada? And two, anything that does potentially come to the States is safe?

[Brian Tyler:]

Thank you, Lisa, for the question. We do think McKesson is in a uniquely informed position given our business in Canada and our presence here in the U.S., obviously. There were two tracks discussed in the plan that came out today. I will say I was encouraged by the fact that it was an invitation for industry and industry participants to bring their perspectives and knowledge into the discussion. And we will plan to be actively engaged in that. So our first and foremost responsibility and priority will be the safety and security of the supply chain, both in the U.S. and in Canada. Now, you rightly point out the Canadian market, from a population standpoint is less than a 10th of the U.S., and I suppose that various manufacturers will adopt various perspectives on what they may or may not do. We will carefully evaluate with various industry partners what the opportunity may be. But the overarching goal will be safety and security for citizens both north and south of a Canadian-U.S. border.

[Lisa Gill:]

And then just as a follow-up, clearly what they're trying to solve first here is overall drug pricing. Can you talk about what we saw in the quarter around drug price inflation on the brand inside as well as the generic, clearly quarterly results coming better and better, especially on the drug distribution in the U.S. component of the business? So just wondering some of the key drivers there, as well as what you're seeing on both inflation and deflation in generics and branded?

[Britt Vitalone:]

Thanks for that question, Lisa. I'll start, and Brian can add. As we talked about, in Brian's remarks on the branded side, what we saw from an inflation perspective was right along in line with our expectations. As you know, the first quarter is generally a softer quarter for branded inflation historically. And what we saw this quarter was really in line with our expectations. And as we think about the full-year, we are reaffirming our guidance of mid single-digit inflation on the branded side. On the generic side, we continue to be very pleased with the performance of our sourcing operation, ClarusONE. What we've seen thus far in terms of our sourcing performance is right in line with our expectations. And on the sell side, as Brian mentioned, we continue to see a competitive market, but we continue to see a stable market. And so we're pleased with our ability to continue to source very competitively, which is certainly benefiting our customers, and we're certainly pleased with the ability to bring that to the sell side and our customers.

[Lisa Gill:]

Great. Thanks for the comments.

[Operator:]

And next will be Michael Cherny with Bank of America.

[Michael Cherny:]

Good evening. Thanks for all the comments so far. Britt, I want to dive in a little bit more into the U.S. pharma performance, maybe a microcosm for the rest of the business. It seems like just given the sheer magnitude of the performance and the outperformance on revenue, relative to at least your guidance, that a lot of it had to be driven by pharma. That being said, we didn't see a ton of gross margin pull-through. Now I might be splitting hairs a little bit here, but can you just talk a little bit about the dynamics in terms of what was the rationale for the slower gross profit growth relative to the revenue growth?

[Britt Vitalone:]

Sure. Thanks for the question. As I mentioned in my comments, some of the revenue growth that we saw came from some of our largest national retail customers. And as you might expect, they don't generate as great a contribution to gross profit. We did see broad-based strong performance across the segment, not only with our largest national retail customers, but we saw good performance in our Health Systems segment, and we continue to see very strong performance in our Specialty business, and so we're quite pleased with that. Overall in the segment, while our gross profit was lower on a consolidated basis, within our U.S. Pharma and Specialty Solutions segment we saw very good performance at the adjusted operating profit line. So, we're very pleased with the performance that we saw, very broad-based performance across that segment. And we think that we're well positioned to continue and achieve our guidance for the rest of the year.

[Michael Cherny:]

And just on the contribution from Change. The way to think about the fact that the numbers didn't change despite the fact that you had a lower ownership stake versus guidance simply driven by the outperformance contribution for 1Q, or is there anything else that changed in terms of just the methodology, aside from just the pure less ownership stake?

[Britt Vitalone:]

I would say that it's a combination of the lower ownership stake being offset by the deleveraging that changed it as a result of raising the funds for the IPO.

[Michael Cherny:]

Okay, great. Thanks so much.

[Operator:]

And next will be Kevin Caliendo with UBS.

[Kevin Caliendo:]

Great. Thanks for taking my call. A question around the guidance, you beat by by $0.30. You only guide it up by $0.15. I know you mentioned the EU business is now expected to be at the lower end of the range. You also mentioned corporate expenses are going to be lower. Is there any other deltas there, is this conservatism. How should we think about the guidance relative to the beat in the quarter?

[Britt Vitalone:]

Sure. So, I think there's a couple of things there, Kevin. First of all, we had good performance. We also called out a one-time gain from investment activities that is within our corporate expenses, that was about $0.10. So, while we had strong performance across really a broad base of our businesses, we did see weaker performance in our European business, and we did lower the range for the full-year as a result of that. We had the one-time unplanned benefit. We had some favorable timing in our corporate expense line. Again -- and we called out at the beginning of the year, we intend to continue making investments in our business both on a data and analytic side and in a technology side. So, we had strong broad-based performance across the business. We had a one-time gain within our corporate expense line. And I think it's early in the year, but we feel very confident, and confident enough to raise by $0.15.

[Kevin Caliendo:]

Okay. And just a quick follow-up on the Medical segment, you give us the revenues ex MSD they would have been up 4%. What would the EBIT growth have been ex MSD in medical as we're not lapping it, just to give us a little bit of a better view of sort of what that business might look like going forward?

[Britt Vitalone:]

Yes, we don't break that down specifically, Kevin, but what I would tell you is we had strong organic performance within that business. And as I mentioned, we had strong pharmaceutical sales performance as well as continued strong performance in our home delivery business. So we're pleased with the overall performance of the segment. We're pleased with the execution against the MSD acquisition. And as I mentioned, across the broad base of that business we had growth in pharmaceuticals, we had growth in our primary care business, as well as our home delivery business, so good organic growth as well as the MSD contribution.

[Kevin Caliendo:]

Great. Thanks so much.

[Operator:]

Next will be Ricky Goldwasser with Morgan Stanley.

[Ricky Goldwasser:]

Yes, hi, good evening. So the first question here on the guidance. Obviously you had a very good performance on the top line. But when we look at your U.S. Pharmaceutical and Specialty Solutions guidance for the remainder of the year, it would suggest that revenues are going to normalize, where we're getting to around plus 4% to negative 1% on the revenue. And on the operating profit as well, kind of like a negative 2% to about 3.3% growth. So was there any kind of like pull forward of revenues this quarter that's going to normalize for the remainder of the year, or what kind of like drove that strength? I understand it is your largest customers, but if you can give us some more color behind that?

[Britt Vitalone:]

Sure, thanks, Ricky. There's nothing unusual about the revenue development in the quarter, there's nothing that I would call out as a pull forward, to use your terminology. And we had very strong performance. It was primarily in our largest retail national accounts. But again, as I mentioned, we had a broad base of revenue growth across the business. One thing I would point out about our adjusted operating profit for the quarter, as I talked about in my opening remarks, last year we did have the opioid litigation cost that were included in that segment's results. And as I mentioned, we recorded $15 million last year for the New York State assessment. So I think you should factor that in. We're very pleased with the performance. We continue to expect to see growth in this segment for the remainder of the year. And we're very pleased with the revenue development.

[Ricky Goldwasser:]

Okay. So let me ask a follow-up on specialty and think this is kind of like the third quarter both you and your peers are highlighting the strength in specialty is benefiting results. So can you just share with us little bit more color on specialty and whether you've seen any contractual changes in the last year that would explain the improvement in benefit because I'm assuming it's not coming from branded inflation. So how should we think about it benefit and how should we think about the sustainability of that benefit. And I think that historically you talked about specialty margin is being below traditional branded drugs. Is that still the case or should we assume that margins have re-rated higher?

[Brian Tyler:]

I'll take this one and Britt can jump in if he'd like. So when you think about the Specialty as a segment and obviously the pipeline of innovation continues to be heavily slanted towards these types of products. In full legacy core U.S. pharma business, the margin profiles and structures you'd be accustomed to, I would characterize as still being in place and so while we do benefit from that specialty growth through good volumes and it is beneficial for us on the gross profit line, it does continue to be modestly dilutive to the rate. I would remind you though we also have a very good business in the community setting related to specialty products and that's both our U.S. oncology network and our unaffiliated community provider business. And those are the businesses where we continue to see really good momentum, really good growth and benefit from the pipeline of both innovative products and frankly biosimilars as they emerge and come to market. And we have a very robust value proposition obviously a complete value proposition in the case of U.S. oncology. And then a wide assortment of tools and services we offer to the unaffiliated community providers and we think that that value proposition continues to earn us the right and the ability to grow and to benefit from the Specialty Pharmaceutical pipeline in general.

[Operator:]

And next will be Ross Muken with Evercore ISI.

[Ross Muken:]

Good afternoon, guys. So I just wanted to go back to kind of the change in other math again because I don't think I have it straight. So in terms of the $108 million versus the prior year and then and that's for Change and then sort of the full-year guide I'm not sure I understand sort of what caused the up step and cadence and then sort of the notable downside. I know the ownership percentage is changing but it still seemed like a big delta and I'm guessing that's essentially what caused the spike in the other segment profits. I'm just trying to figure out sort of why that cadence was kind of funkier than what I think one would have expected?

[Brian Tyler:]

Sure. Thanks for the question, Ross. So let me start with just the other side of the other segment just generally. With that segment we have our Canadian business we have our MRxTS businesses which are very strong businesses and growing very well for us. And we have our Change, our equity investment in Change. First I'd point out that our Canadian business continues to perform well, we certainly talked about the impact from the generic legislation at the beginning of the year. And that team really did a great job in mitigating that. And we're pleased with the performance of Canada, our MRxTS businesses continue to grow very well and we're making invest -- continue to make investments in those businesses. Within our Change asset, we did have the ownership Change from 70% to 58.5% effective in our second quarter. And in that second quarter, you'll also see the impact from the delevering. Within the first quarter though, there are a couple of things that I would point out. First of all Change had as most companies had the implementation of the revenue recognition standard and that created a timing element for the year. For the full-year that's not going to have an impact on McKesson but it does have an impact earlier, favorable impact earlier than year and then a reverse out as the year goes on. And then of course as you think about that business, there's a mix of income between taxable, non-taxable depending on the legal entity. So what I would say is primarily for the first quarter, you see some timing impact from the revenue recognition standard and you see a mix of income between the entities of taxable and non-taxable.

[Ross Muken:]

Got it. And then maybe just thinking about sort of, maybe business development activity or the M&A side of things, a lot of things and services, including your own asset, obviously have challenging multiples. And there's a lot of political wins going on, I guess, how do you sort of frame what's the right time to be more active again, on sort of tuck-in M&A and how the risk reward sort of, is there versus just continuing to buy your own equity, which given is cash flow yield seems like a reasonable investment.

[Brian Tyler:]

Yes, thanks. Thanks for the question. And I think we would characterize our M&A activity in recent quarters of being relatively light, that doesn't mean that we're out of that space. And then, I think when we think about capital allocation, and we're always very focused on where are the opportunities to deploy capital to build platforms and businesses and services for sustainable growth over the long-term. We are being very diligent to make sure that as we look at this process that is guided by our strategy, that's guided by our focal areas, it's guided by the markets and segments where we think we have good businesses, strong teams, the right to win. And anywhere in those segments, we can find assets that are complimentary and accelerate and an accelerant to our business. We're quite interested in those. We obviously consider alternative use of the capital and return of the capital in making those calculations and final determinations of what's the best way to deploy that capital on behalf of our shareholders. So we continue to be active, we continue to be in deal flow. We continue to look carefully at the landscape with an eye to make sure it's aligned strategically that it's an investment and accelerant. And that it is the smartest way to deploy capital across the various uses of capital we have.

[Ross Muken:]

Thanks, guys.

[Operator:]

And moving on to Stephen Baxter with Wolfe Research.

[Stephen Baxter:]

Hi, thanks for the question. I wanted to ask about the sell side environment. You said in the past that in general your contracts last about three years. So it appears to be coming up against some of the independent pharmacy contracts that renewed during 2016. Can you give us, and hopefully give us a sense of what proportion of those contracts have been addressed at this point? And also any color you can write on with the discussions look like in terms of helping your pharmacy partners deal with the pressure they are under would be very helpful, thanks.

[Britt Vitalone:]

Yes, so typically, as we've talked about, we would renew roughly a third of our contracts in any one given year. We recently got through two big retail national account renewals successfully, which was great news and I'd say, I'd characterize this year is having a fairly normal portfolio of renewals and renewal activities. So I wouldn't point to anything particularly unusual in that regard. You know, we work with our partners over the life of these contracts. We are typically engaging in, day-to-day and discussions; we begin conversations well in advance of any sort of sudden renewal activity. So we really view it as kind of an ongoing dialogue and an ongoing partnership over the course of these contracts. And you'll be well familiar with our track record of renewing these particularly larger deals as it relates to independence in general and what are we doing to help independence? I would say independence is probably long been at the core of McKesson as a company. It's a key part of our commitment that community practices we think being central to addressing the access cost and quality issues this country faces the independence -- continue to benefit from the programs and services that we invest in. They can hence, they can choose to consume that and a sort of all-encompassing way through a relationship with Health Mart and our access reimbursement services that come along with that. But we are constantly looking at how we innovate for them both and how they interact with their patients, how they attract patients and draw footfall to their stores, how they monetize that footfall, both in front and behind the counter, and we work with them, day-in and day-out and then just the efficiency of the operation of their business. Community pharmacy today feels reimbursement pressure, it's felt that pressure every year, I've been in the business and that's almost 23 years now. So we partner with them very closely to help them ensure their position to survive and adapt and innovate and independent community pharmacies do tend to be creative individual business folks who find ways to unmet needs in the communities they serve.

[Stephen Baxter:]

Okay, thanks. I appreciate the color. And then just one quickly on capital deployment and the pacing of share repurchase, so it looks like if you carry this magnitude of share repurchase through the balance of the year, you'd end up with something a few million shares below where your guidance is which looks like 185 million shares unchanged versus previous, so I was wondering if you could help us understand the progression of share repurchase and how you guys approach the balance between opportunism and planned activity throughout the year. Thanks.

[Brian Tyler:]

Yes, thanks for the question. I would just reaffirm that we've not changed our assumption on our diluted shares for the end of the year. We don't have a set amount that you should think about for modeling to take it from quarter-to-quarter. We think about capital deployment and as Brian mentioned, we think about it opportunities on strategy and where we have opportunities to invest on strategy or invest internally, we do that. And certainly, we've had an opportunity this quarter to return more to our shareholders. So we make those decisions on a regular basis, but in terms of our guide on shares for the end of the year, we've not changed that.

[Operator:]

And our next question will come from Eric Percher with Nippon Research.

[Eric Percher:]

Thank you. I'd like to go back to the gross margin question and maybe given the comments around independents I know that was one segment that hasn't been driving the same contribution that some of the other areas, the retail nationals and other less profitable accounts maybe as you think about the growth in revenue and what that translates into had a press profit growth level at a period of time where independents aren't driving it and a period of time where generic contributions aren't as high what do you see as the and natural growth rate?

[Brian Tyler:]

Well, Eric, what I would point to is if you look at our consolidated gross margin, there is multiple factors to consider in here and one of the things that impacted our gross margin in the quarter was the weak retail results in our U.K. business within Europe. And clearly, we had a large proportion of revenue being driven by our largest retail national account. We have, we had a very broad base of revenue growth across our business and overall I would just say that one of the things that impacted to the negative side was not only the mix of revenue, but the impact from a weak retail environment in the U.K. We think about our independent customers within U.S. Pharma. We haven't seen anything different this quarter from the previous couple of quarters. It was -- I don't know that there's anything really to call out specific about that.

[Britt Vitalone:]

Yes, when we look at the kind of reimbursement environment that retail independents are facing, I think we talked last quarter about the fact that we look at our data, we really see an aggregate a very normal headwind there has been established something that's kind of been consistent with prior years. And on average, that is true statement within that average there are based on patient mix and contracts that the government private commercial product mix and the really the patient population in your in catchment area, you can see some winners and some losers. But on a blended way is really feels like a steady the same steady reimbursement headwind we've been accustomed to.

[Eric Percher:]

So I think we see that and certainly the headwind in international gross margin is evident, but my question is really where we don't see at a distribution and specialty segment level, what are your thoughts on the ability to drive gross profit growth relative to revenue growth and that's really the question was getting at?

[Brian Tyler:]

Well, as we've talked about previously, Eric the growth of specialty products is going to have a dilutive impact on the rate. It's certainly very good for us from a margin dollars perspective as I think about that the U.S. Pharma and Specialty Solutions business, again, it's a business that is broad-based from a distribution perspective, both in the nature of the products in the customers, but also the specialty businesses that Brian talked about our U.S. oncology asset, our provider base that we have and also the manufacturing life capabilities that the services that we provide to the manufacture those also add to our gross margin profile. So, and I think about our distribution business is very scale certainly is impacted by the product mix, but the fact that it's broad-based in terms of our U.S. Oncology asset or other specialty assets and then our manufacturing services assets, I think that really does give us the opportunity to develop that gross profit over time.

[Eric Percher:]

Thank you.

[Operator:]

And our next question will come from Brian Tanquilut with Jefferies.

[Brian Tanquilut:]

Hey, good morning guys. Congratulations. Britt just want to follow-up on Ricky's question from earlier clarify that question again. So you put up an 8% growth number in the U.S. for Q1 and yet you're maintaining the guidance calling low to mid single digits. So is there anything we should be thinking about that could drive a deceleration in growth. I mean you've talked about specialty being strong or is there anything to call out there?

[Britt Vitalone:]

Yes, I would the thing that I would point out is I think we saw a larger proportion of revenue from our largest retail national accounts in the quarter. We still expect to see very strong revenue growth in the mid single digit range for the year. I think as you just think about the quarterization of that, we saw it a larger proportion of that coming from our largest accounts and that had obviously a very favorable impact in the quarter.

[Brian Tanquilut:]

Got it. All right, thanks guys.

[Britt Vitalone:]

Thanks, Brian.

[Operator:]

Our next question will come from Robert Jones with Goldman Sachs.

[Robert Jones:]

Great. Thanks for the questions. I guess similar one Britt on the corporate expense side. You're pointing towards the lower end but just looking at where you ended up in the quarter, it still seems like quite a big ramp through the year to get there. Anything you know of or that you anticipate on the corporate expense side that it would be terribly different than what we saw in the quarter. And then I guess Brian just I'll throw my follow-up out there. I'm sorry if I missed this in the prepared remarks but large proposed generic merger out there. Curious if or how impactful that would be on not only ClarusONE but on McKesson in general if you had a view that would be great. Thanks.

[Britt Vitalone:]

Thanks for the question. I'll start and then I'll turn it over to Brian as we think of our corporate expenses at the beginning of the year, we talked about the things that are driving the higher corporate expense year-over-year. We talked about the increase in opioid litigation costs. We talked about the increased investments that we were making in technology particularly infrastructure and data and analytics. We still intend to make those investments throughout the year. We had a favorable timing related impact in the first quarter but our intention is to continue to invest in those capabilities as we go throughout the rest of the year. We also in my remarks, I talked about our opioid litigation cost projection for the full-year still remaining at $150 million. And then the thing that I did talk about that is included on our corporate expenses was the onetime benefit we had from investing activities which reduced our corporate expenses in the quarter and that allowed us to take our guide corporate expenses down to the low end of the range that we provided at the beginning of the year.

[Brian Tyler:]

Robert to your second question, we actually did not comment on this, I think in our opening remarks. So thank you for the question on the Pfizer-Mylan merger. So I would start by saying that these we have strong relationships with both of these organizations and they've been important partners for us. And if McKesson and in ClarusONE the rationale for the merger as I understand it is broadening of the portfolio, there is some cost synergy, some efficiency and frankly at the scale that we operate and by being partners with large scale healthy organizations that are capable of continuity of supply and competitive pricing is it can be a good thing. So we'll evaluate how this merger comes together. We'll continue to be a dialog with them but it wouldn't say it poses any imminent concerns from our perspective.

[Operator:]

And our next question will come from Charles Rhyee with Cowen and Company.

[Charles Rhyee:]

Yes, hey thanks for taking questions. I think you touched on biosimilars being a benefit particularly in the oncology network. Can you talk about sort of your outlook here? I think there's some talks about I think insulin moving over to jurisdiction by the -- I guess with the biologics group and FDA, CIBR and that that could pave the way for interchangeability on at least with biosimilars insulin. Maybe your thoughts on where you're seeing sort of that regulatory landscape right now and how you think about that opportunity and what it means further down the road for you?

[Brian Tyler:]

Well, I mean the biosimilar landscape in general, we feel pretty positive about more choices more substitute ability or interchangeability that gives clinician, the more choices hopefully gives it helps addressed cost challenges we see in the marketplace and we think with the footprint of providers that we have in the community, we're particularly well positioned to take advantage of those trends. So, we also continue to work with innovators, first and foremost, as we think about these if the patient outcome is a clinical-oriented decision is what product is best in the formulary to meet the clinical needs to the extent, there are a variety of choices and interchangeability that tends to be good for a company like us with the markets and channels that we serve that choice tends to be a positive thing for us.

[Charles Rhyee:]

Is that something that you think is coming close in that you're trying to plan ahead of that or is that you feel there is still a ways off?

[Brian Tyler:]

It's really hard to comment on what the regulatory pathways will be and timing and our recent experience in policy arena tells us anything, it's very difficult to forecast. What may come out, lots of discussion what they come out ultimately and what it may look like in its final form it would be, it would probably not be in my best judgment to try to predict that for you.

[Charles Rhyee:]

Okay, fair enough. And just one last question, you talked about the FX impact being sort of net neutral but if I look, it seems like, particularly the pound and the euro have been getting weaker relative to the dollar, how are you guys thinking about that or sort of what your expectations around that. Thanks.

[Britt Vitalone:]

Yes, I don't want to predict the direction of the pound. On a consolidated basis, it doesn't have a material impact. But as I called out, it did have an impact on revenues within the Europe segment for the quarter. So, obviously we'll watch that very carefully but as we think about it on a consolidated basis, we don't see an impact.

[Charles Rhyee:]

Great, thank you.

[Holly Weiss:]

Operator, you have time for one more question.

[Operator:]

Certainly that question will come from Eric Coldwell with Robert W. Baird.

[Eric Coldwell:]

Hi, thanks very much and good evening. Most of my main ones recovered but I'll shift gears a bit, I would like your thoughts on generic introductions for the rest of the year if possible, expected to be a good guy or a bad guy to profitability on a year-over-year basis and then specifically if I dare ask Lyrica comes out with roughly 10 manufacturer is a very low initial price. How did that impact pretty big product, how does that impact your thinking on generic profitability in trends in that market seen so many manufacturers launch it such a deep discount to the brand.

[Brian Tyler:]

Yes, thanks for that question. Generic launches as we've talked about do not have the size of impact that they used to have -- they have a modest impact on our profitability. So we don't see that having any change from our previous views on that. In terms of Lyrica, we are very fortunate to have a strong sourcing organization like first one where we can partner with multiple manufacturers. We don't see that Lyrica is going to change the direction of our generics profitability will certainly be a benefit for us and it will certainly be a benefit from our customers, but it will have a modest impact at most.

[Eric Coldwell:]

Great.

[Brian Tyler:]

Well, thank you everyone for your questions, and thank you, Justin for facilitating this call. I want to thank everyone on the call today for your time. McKesson is off to a strong start for our fiscal 2020 and I'm really excited about the opportunities ahead of us. I do want to take a minute to recognize the outstanding performance of really all of the McKesson employees and team members and their contributions to help our customers improve lives and deliver opportunities, make better health possible. So thank you team McKesson. Have a good evening everyone.

[Operator:]

Well, thank you for joining today's conference call. You may now disconnect, and have a great day.