Earnings Call Transcript - MCK Q1 2020

Operator, 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, Senior Vice President

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. 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 press release and our slide presentation, 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. During this call, we will discuss non-GAAP financial measures. Additional information about our non-GAAP financial measures, including a reconciliation of those measures to GAAP results is included in today's press release and presentation slides, and is also available on our website at investor.mckesson.com. With that, let me turn it over to Brian.

Brian Tyler, CEO

Thank you, Holly, and thanks to everyone for joining us on our call today. We're pleased 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. 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, enabling us to become a more focused and efficient company. 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. Talking about generics for a moment, similar to the last few quarters, our ClarusONE sourcing platform continues to deliver yield in line with our expectations. With its scale, we're able to buy at prices that are competitive with our peers. On the sell side, we continue to see a market that is competitive but stable. A few comments on Europe, our U.K. retail business performance was impacted primarily by temporary wide NHS underfunding which we believe should improve in the second half, and to a lesser extent volume weakness. Performance in the other European countries was not enough to fully offset these challenges. Britt will speak to the expected full-year impact. Before I address the NHS more specifically, let me remind you of the actions we've previously taken in the U.K. and across Europe to reposition the business for long-term profitability. With new leadership at the helm, we're making solid progress towards further rationalizing our store footprint and streamlining our back office functions. We continue to evaluate our cost structure as we do in all our businesses. Turning back to the NHS, we're pleased by recent announcements, first, to increase the retail tariff, beginning in August. We would expect to see further upward revisions in tariff later in the year, which should partially make up for any underfunding. The NHS also announced the new five-year Community Pharmacy Contractual Framework. This framework brings greater clarity and long-term certainty by maintaining the current level of industry funding for community pharmacies for the next five years. While certain elements of the funding allocation are yet to be fully defined and could evolve over the five-year time horizon, we view this as an incrementally positive development for our European business. McKesson remains active in its support of and direct discussions with the U.K. government on the future of community pharmacy and healthcare in the U.K. Turning to MedSurg, our Medical-Surgical business continues to generate above-market strong organic growth with its focus on delivering care in low-cost patient settings, and we have now lapped the Medical Specialties Distributor or MSD acquisition, which is delivering results in line with our expectations. We saw good growth across multiple markets and product categories, including Lab, Pharmaceutical, and McKesson Private Label. The non-acute space continues to be an encouraging area for us. Like others in healthcare, we continue to see care shift to these non-acute settings where we currently operate. With investments such as MSD and our new technology in our distribution centers, we're continuing to expand our services to these providers and to their patients. Turning to the other segment, which primarily consists of Canada, McKesson Prescription Technology Solutions or MRxTS, and our investment in Change Healthcare, we see improving prescription trends in our owned Canadian retail business which reflects our focus on the retail customer experience. We've made investments in people and reconfigured pharmacy formats. With strengthening fundamentals, we believe this can reinforce the role that community pharmacy plays in Canadian healthcare. Within MRxTS, we continue to see good growth in CoverMyMeds and the RelayHealth Pharmacy, driven by unique technology offerings that resonate with both our retail and biopharma partners. We continue to make investments in this business to position us for future growth. Change Healthcare achieved an important milestone with the completion of its initial public offering in June. Britt will speak more about this and what we can expect going forward. We're also investing in platforms that enhance our data and analytics capabilities. We realized benefits across the enterprise in the first quarter, and we expect to see expanding benefits in the future. I now want to touch upon drug pricing reform and the policy landscape. I had the opportunity recently to spend a few days in Washington, D.C. McKesson continues to engage as a key stakeholder in educating policymakers to address issues that may impact patients, our industry, and community-based pharmacy and medical practices, helping to drive the necessary change to support access, quality, and affordability for a sustainable healthcare system. These objectives align with the administration's goals, and we're committed to continuing the dialogue with policymakers and industry partners on sound, sustainable, and pragmatic solutions. It remains a dynamic environment, yet we remain confident in McKesson's path forward. We see the critical role of the services we provide to the healthcare industry today, and our ability to identify and apply solutions to address the most pressing challenges to the healthcare system globally. Let me address two of the most recent developments. The Senate Finance Committee published a package of measures last week. We anticipate there might be further modifications as the package makes its way through the legislative process. So at this point, we're not in a position to go into great detail on specific provisions. However, we will continue to engage with policymakers and industry partners to ensure that these reforms support the efficiency, sustainability, and security of the supply chain as we seek to improve cost, quality, and access. Finally, earlier today, the U.S. Department of Health and Human Services, or HHS, and the U.S. Food and Drug Administration, or FDA, announced a Safe Importation Action Plan. Given how recent this announcement is we haven't yet had the full time to digest or study this plan, but maybe a few just quick preliminary thoughts. Obviously, McKesson's presence in both U.S. and Canada gives us a unique perspective on supply chain considerations and the impact to stakeholders and patients as we navigate this complex question of importation. There are legitimate concerns that importation could potentially introduce counterfeit or fraudulent products into the U.S. Importantly, we have a primary responsibility to maintain a safe, secure, and efficient supply chain, and to ensure that we conform to FDA safety and efficacy standards in addition to the safeguards put in place by the 2013 passage of the Drug Supply Chain Security Act. These objectives are paramount as we evaluate the two pathways announced in today's plan. Before I wrap up, I'd like to spend a couple of minutes on the opioid epidemic. We continue to believe distributors are being disproportionately targeted given our important but limited role in the supply chain. Filling orders from licensed pharmacies who are in turn filling prescriptions written by licensed healthcare providers, any suggestion that McKesson drove demand for opioids in this country would reflect a fundamental misunderstanding and mischaracterization of our role as a distributor. We will continue to fight that mischaracterization in the multiple venues, both state and federal, where lawsuits have been filed by thousands of plaintiffs. These are clearly novel, complex, and unprecedented claims that must be navigated. We remain deeply concerned about the impact of this crisis on families and communities across the U.S., and are passionately committed to using McKesson's capabilities to be part of the solution. This includes partnering with government, industry, social institutions, and other players to help bring this crisis to an end. I've spoken about it before, but let me remind you of the investments we've made and continue to make in our programs, our processes, and our technologies dedicated to preventing diversion, and our corporate initiatives, announced last spring, to help manage the epidemic. Those include educating the pharmacies and hospitals to whom we deliver about the importance of compliance with the EA Regulation, creating a nationwide clinical alerts system that uses patient prescription history to identify patients at risk of opioid overuse, abuse, addiction, or misuse, and actively advocating for public policies that will help address the opioid epidemic. In addition, we contributed $100 million to establish the foundation for opioid response efforts; a foundation dedicated solely to driving solutions to the epidemic. I'm proud of our teams and our team members who ensure the safety and security of our supply chain day in and day out. With that, let me turn the call over to Britt.

Britt Vitalone, CFO

Thanks, Brian, and good afternoon. McKesson had another strong quarter and a solid start to fiscal 2020. The slides for this afternoon's review are available in 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, exceeding our initial expectations, and we are raising our full-year fiscal 2020 outlook by $0.15 to a range of $14 to $14.60 per diluted share, up from our previous outlook of $13.85 to $14.45 per diluted share. Now, let's look at our first quarter results. Our first quarter adjusted earnings of $3.31 per diluted share increased 14% year-over-year, driven by strong performance in the U.S. Pharmaceutical and Specialty Solutions business, Medical-Surgical Solutions, and our MRxTS businesses. This growth was supported by a lower share count, higher contributions from our equity investment in Change Healthcare, a one-time gain from investment activities, and expense timing. These factors were partially offset by expected year-over-year increases in opioid litigation and technology costs that we highlighted with our initial outlook in May, as well as lower profit contributions from the European segment and a higher adjusted tax rate. Starting with our consolidated results, as noted on slide four, consolidated revenues for the quarter rose 6% year-over-year, mainly driven by growth in our U.S. Pharmaceutical and Specialty Solutions segment. Adjusted gross profit grew 2% year-over-year, primarily due to several key operational factors. Within our Medical-Surgical business, we saw contributions from the MSD acquisition, which we have now lapped, as well as above-market growth in pharmaceutical products, increased volume across our MRxTS offerings, and growth in our specialty provider solutions business within the U.S. Pharmaceutical and Specialty Solutions segment. These gains were partially offset by foreign currency impacts and reduced retail pharmacy margins in the U.K. Adjusted operating expenses for the first quarter increased 1% year-over-year, partly due to the acquisition of MSD from the previous year. Adjusted income from operations was $933 million for the quarter, representing a 9% increase compared to the prior year. Interest expense totaled $56 million for the quarter, down 8% compared to the prior year as a result of lower commercial paper balances. Our adjusted tax rate was 22.6% this quarter, primarily due to our business mix. We continue to project a full-year adjusted tax rate of approximately 18% to 19%, with potential variations from quarter to quarter, and this includes anticipated discrete tax items we expect to realize throughout the year. Income attributable to non-controlling interests was $54 million for the quarter, a 7% decrease compared to the previous year, aligning with our expectations. Our adjusted net income from continuing operations was $625 million, with diluted weighted average shares outstanding at 189 million for the quarter, a 7% decrease year-over-year. Next, I will discuss our segment results, which can be found on slides five through eight, starting with U.S. Pharmaceutical and Specialty Solutions. First quarter revenues amounted to $44.2 billion, an 8% increase year-over-year, fueled by strong performances from our largest retail pharmacy customers, growth in our specialty businesses, and robust contributions from our health systems segment, though somewhat offset by branded-to-generic conversions. The segment's adjusted operating profit increased 11% to $600 million, primarily driven by strong growth in our specialty businesses, solid performance in our sourcing operations, and the lapping of prior opioid-related expenses from last year. In the European Pharmaceutical Solutions, first quarter revenues declined 3% year-over-year to $6.7 billion. Adjusted for FX, revenues grew 3% due to market growth in the distribution wholesale business. Segment adjusted operating profit fell 50% to $37 million on an FX adjusted basis, primarily due to pressure from the weak retail pharmacy environment in the U.K. The segment's adjusted operating margin rate was 50 basis points on an FX adjusted basis, a decrease of 55 basis points. Our first quarter results were below expectations due to weak retail pharmacy margins in the U.K., attributed to industry-wide underfunding by the NHS. We expect a modest improvement in this underfunding in the second half of fiscal 2020. As discussed earlier, we took measures in the U.K. and Europe during fiscal 2019 to reposition the business for long-term profitability, including store rationalization and cost actions. We are committed to continuing these restructuring initiatives as we assess our cost position. Consequently, we now anticipate European segment adjusted operating profit growth to remain on the low end of our original projection of low to mid-single-digit percentage growth. Moving on to Medical-Surgical Solutions, first quarter revenues were $1.9 billion, representing a 12% year-over-year increase. Excluding the MSD acquisition, which closed on June 1, 2018, segment revenue increased 4%, driven by growth in our primary care and Extended Care business, which benefited from strong pharmaceutical product sales and home delivery services. The adjusted operating profit for the segment rose 27% to $159 million, boosted by organic growth and contributions from the MSD acquisition, with the adjusted operating margin rate increasing to 836 basis points due to market growth and effective cost management. Lastly, in our "Other" category, revenues amounted to $3 billion for the quarter, down 1% year-over-year. On an FX adjusted basis, revenues grew 2%, mainly due to the performance of our MRxTS business. Other adjusted operating profit increased 31% to $279 million on an FX adjusted basis, driven primarily by increased equity income from our investment in Change Healthcare and continued strength in our MRxTS business. As of June 27, 2019, Change Healthcare began trading on the NASDAQ, marking a significant milestone for the company. While Change Healthcare is now publicly traded, McKesson will continue to report equity income based on our ownership percentage and will report its results one month in arrears. Following the IPO, McKesson’s equity ownership in Change Healthcare stands at approximately 58.5%, effective from the second quarter. Accounting for this new percentage and Change Healthcare's debt repayment after the IPO, we expect the adjusted equity income from our interest in Change Healthcare for fiscal 2020 to remain within our previously stated range of $250 million to $270 million, reflecting 70% ownership throughout fiscal 2020. Our adjusted equity interest assumptions for Change Healthcare, along with future results and analyses, will align with McKesson's ownership stakes based on our definition of adjusted earnings, which will again apply to reporting on a one-month lag. Questions concerning the operational performance or outlook for Change Healthcare will be addressed by the management team. The IPO represents a critical step in McKesson's strategy to unlock value for our shareholders as we work towards an efficient exit from our investment in Change Healthcare. There are specific lockup periods and milestones that must be met prior to our exit, including a customary six-month lockup post-IPO, followed by a potential secondary offering from Blackstone or our equity partner in Change Healthcare. Given these factors, our exit could extend to 12 to 18 months, though we may have the opportunity to exit by the end of fiscal 2020 depending on milestone requirements. We will keep you updated on the progress through these lockup periods and milestones as we approach our exit. Regarding corporate expenses, McKesson recorded $137 million in adjusted corporate expenses for the first quarter, a 44% increase compared to the previous year. This growth was mainly driven by rising opioid-related litigation costs and the timing of technology investments for the fiscal year, though it was partially mitigated by a one-time benefit of around $0.10 recorded in the first quarter. We incurred $36 million in opioid-related litigation costs during the first quarter. We expect these costs to total around $150 million in fiscal 2020. Based on the one-time benefit noted, we now anticipate corporate expenses to be at the lower end of our original guidance of $725 million to $775 million. Turning to our cash position, we ended the quarter with a cash balance of $1.9 billion. During the quarter, we encountered negative free cash flow of $162 million, which was better than anticipated. It's important to note that cash flow can vary each quarter due to timing issues, particularly around the close of financial periods. We continue to project free cash flow of approximately $2.8 billion to $3 billion for fiscal 2020. Investing in growth opportunities remains a high priority for McKesson. This quarter, we invested $111 million in capital expenditures and $46 million on acquisitions, with a focus on internal investments in areas such as data analytics and information security. In the quarter, we returned value to our shareholders through $684 million in common stock repurchases, leaving $2.8 billion remaining in our share repurchase authorization. We also paid $75 million in dividends during the quarter. Additionally, our board approved a 5% increase in our quarterly dividend to $0.41, which will be disbursed to shareholders in October. In closing, we are pleased with the strong start to the year. In the first quarter, we experienced growth in most of our businesses, which outweighed the challenges in the retail pharmacy market in the U.K. Our first quarter outcomes, buoyed by an unanticipated one-time benefit of $0.10, bolster our confidence in the adjusted earnings guidance for fiscal 2020. Consequently, we are raising our adjusted earnings outlook by $0.15 to a range of $14 to $14.60 per diluted share, indicating solid growth of about 5% at the midpoint compared to fiscal 2019. I would like to remind everyone that we do not provide quarterly guidance. However, for your modeling, we expect the percentage of adjusted earnings per diluted share in the first half of the year to be consistent with that of the second half as we experienced in fiscal 2019. Overall, we are satisfied with the focus and execution of performance across the company, with a great start to fiscal 2020. Brian and I are now happy to take your questions.

Operator, Operator

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

Lisa Gill, Analyst

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, CEO

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. 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 tenth 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 the Canadian-U.S. border.

Lisa Gill, Analyst

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 side as well as the generic side, 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, CFO

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. What we saw this quarter was really in line with our expectations. 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. As Brian mentioned, we continue to see a competitive market, but we continue to see a stable market. So we're pleased with our ability to continue to source very competitively, which certainly benefits our customers, and we're pleased with the ability to bring that to the sell side and our customers.

Michael Cherny, Analyst

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, CFO

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. 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. We think that we're well positioned to continue and achieve our guidance for the rest of the year.

Kevin Caliendo, Analyst

Great. Thanks for taking my call. A question around the guidance, you beat 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, CFO

Sure. There are a few points to address, Kevin. Firstly, we had a strong performance overall. We noted a one-time gain from our investment activities that contributed approximately $0.10 to our corporate expenses. While we experienced robust performance across most of our businesses, our European segment performed weaker than expected, prompting us to adjust our full-year outlook downward. We benefited from an unexpected one-time gain and favorable timing in our corporate expenses. As we indicated at the start of the year, we plan to keep investing in our business, particularly in data, analytics, and technology. Overall, we experienced broad-based strong performance, had a one-time gain in our corporate expenses, and while it's still early in the year, we feel very confident, which is why we raised our guidance by $0.15.

Ricky Goldwasser, Analyst

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, CFO

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. 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 costs 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.

Brian Tanquilut, Analyst

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, CFO

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. 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.

Robert Jones, Analyst

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 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, CFO

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. The one 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, CEO

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. I would start by saying that we have strong relationships with both of these organizations and they've been important partners for us. If McKesson and in ClarusONE, the rationale for the merger as I understand it is the broadening of the portfolio, there are 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 can be a good thing. We'll evaluate how this merger comes together. We'll continue to be in dialog with them but it wouldn't say it poses any imminent concerns from our perspective.

Charles Rhyee, Analyst

Thank you for taking my questions. You mentioned that biosimilars provide a benefit, especially within the oncology network. Could you share your outlook on this? I've heard discussions about insulin transitioning to the biologics group under FDA regulations, which might facilitate interchangeability for biosimilar insulin. What are your thoughts on the current regulatory environment regarding this and how it presents an opportunity for you in the future?

Brian Tyler, CEO

Well, I mean the biosimilar landscape in general, we feel pretty positive about more choices and more substitutability or interchangeability that gives clinicians, the more choices hopefully helps address 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. 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.

Holly Weiss, Senior Vice President

Operator, you have time for one more question.

Operator, Operator

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

Eric Coldwell, Analyst

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 manufacturers 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, CEO

Yes, thanks for that question. Generic launches do not have the same level of impact on profitability that they used to, and we expect a modest effect moving forward. Regarding Lyrica, we are fortunate to have a strong sourcing organization that allows us to partner with multiple manufacturers. We don't anticipate Lyrica will significantly alter our generics profitability, but it will certainly benefit us and our customers, albeit with a modest impact at most. 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, Operator

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