Earnings Call Transcript
MCKESSON CORP (MCK)
Earnings Call Transcript - MCK Q2 2022
Operator, Operator
Thank you, Sarah. Good afternoon and welcome everyone to McKesson's Second Quarter Fiscal 2022 Earnings call. Today, I'm joined by Brian Taylor, 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 factor 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 reconciliation of those measures to GAAP results is included in today's press release and presentation slides, which are available on our website at investor.McKesson.com. With that, let me turn it over to Brian.
Brian Taylor, CEO
Thank you, Rachel, and good afternoon, everyone. Thank you for joining us on our second quarter call today. We are happy to report another strong quarter for McKesson, driven by continued market improvements and the underlying fundamentals of our businesses. We achieved double-digit adjusted operating profit growth in all four segments based on a strong operating performance and alignment across the enterprise. As a result of our second quarter performance, our confidence in the second half of the fiscal year, and McKesson's continued role in the COVID-19 response efforts, we are raising our guidance range for fiscal 2022 to adjusted earnings per diluted share from $19.80 to $20.40 to a new range of $21.95 to $22.55. We continue to believe we will see a return to pre-COVID pharmaceutical prescription and patient engagement levels in the second half of our current fiscal year. We are encouraged by the trends we continue to see across primary care specialty and oncology patient visits, in addition to overall prescription volumes. We're pleased to see our markets are recovering in line with our original expectations. Our enterprise-wide focus on our Company priorities is driving operating performance and furthering the advancement of our long-term growth. I would like to take the time today to talk about each of our Company's priorities. First, we have a focus on our people and the culture, which is guided by our ICARE and ILEAD values. These values include a commitment to both our local and global communities, our customers, and the healthcare industry to innovate and deliver opportunities that make our customers more successful, all for the better health of patients. Along with these values, we're committed to fostering an inclusive workplace that celebrates our differences and respects the diverse world in which we live and work. As an organization, we continue to be committed to diversity, equity, and inclusion through a more diverse and inclusive workplace we are a stronger, more creative, and a more productive team. At McKesson, our priority has been the health and safety of our employees, and we're deeply committed to supporting our team members across the organization, which is why I'm incredibly pleased to have announced McKesson's first-ever day of wellness, which we call 'Your day, your way.' This will take place this Friday, November 5th. We understand that mental, physical, and emotional well-being are most important to our team. So, we've made the decision to set aside a special day to help ensure our employees can rest, recharge, and take time for themselves. We're so grateful for all the contributions from the team over the last 19 months. McKesson employees continue to be at the center of the fight against COVID-19 and we want to make sure everyone gets a chance to take a well-deserved break. Our second priority is to strengthen our core pharmaceutical and medical supply chain businesses across North America, we have a best-in-class pharmaceutical supply chain. As a reminder, in the U.S. we have a scale distribution presence that delivers roughly one-third of prescription medicines each day. Our operational excellence and our ability to leverage our scale of global suppliers is one of the many reasons why McKesson continues to be the partner of choice for hospitals, health systems, and pharmacies of all sizes. We strengthened our business when we strengthen our customers and partners. This past quarter, we held our annual McKesson Idea Share educational event, which brought together independent pharmacy operators to help them learn new skills, how to grow strategically, and how to operate efficiently. The virtual experience helped 2,000 independent pharmacies prioritize education and networking, which we believe will shape the future of community pharmacy and strengthen the independent business for the better. In Canada, we've been the leader in healthcare related logistics and distribution for 100 years, and we support hospitals, community, and retail pharmacies to ensure that medication is always available. We're a leader in medical distribution to alternate site markets, and our footprint in the U.S. healthcare is underpinned by our strong sourcing and supply chain capabilities. We deliver medical and surgical supplies and services to over 250,000 customers. Our pharmaceutical and medical distribution businesses continue to play an integral role in the pandemic response efforts. And our capabilities have been highlighted through our evolving partnership with the U.S. government's COVID-19 vaccine distribution, kitting, and storage programs. I'm glad to say that the fundamentals in our core business remain solid and our execution has continued to improve as we accelerate our growth and work to deliver high-quality, resilient supply chains to our customers. Our third Company priority is to simplify and streamline the business. We're prioritizing the areas where we have deep expertise and are central to our long-term growth strategies, largely within the North American market. As a result, we made the decision to fully exit McKesson's businesses in the European region. In July, we announced that we have entered into an agreement to sell our European businesses in France, Italy, Ireland, Portugal, Belgium, and Slovenia to the Phoenix Group. Today, we're announcing that McKesson has made the decision to sell our UK retail and distribution businesses as a whole. The transaction is expected to close in Q4 of Fiscal 2022, subject to customary closing conditions, including receipt of required regulatory approvals. We believe this step toward a full exit of our European business is an important milestone in our strategy as a streamlined, efficient, focused organization. Building upon the foundation of a strong company culture, and a stable business, the last company priority encompasses our two strategic growth pillars. We are investing to advance our Oncology and Biopharma services, which includes building integrated ecosystems that leverage our differentiated assets and capabilities, and our strategic focus on these two pillars is important as both of these areas have good inherent growth opportunities. McKesson's oncology ecosystem supports over 14,000 specialty physicians through distribution and GPO services. And we are the leading distributor in the community oncology space. We have over 1,400 physicians in the U.S. Oncology Network spread over approximately 600 sites of care in the U.S. Within our oncology ecosystem, Ontada generates insights at the intersection of technology and data, and supports community providers with precise cancer care by improving patient outcomes and delivering evidence and insights to help accelerate life sciences research. The ecosystem helps clinicians provide better care in an increasingly complicated oncology care landscape by helping them grow their businesses, attract more patients, and produce better health outcomes. We can then leverage interconnected technology and real-world insights to speed data backup stream to manufacturers, which can help them think about identifying new products, innovations, and new markets. Within the biopharma ecosystem, our Prescription Technology Solutions businesses leverage technology networks and access to provide our workflows to serve biopharma and Life Sciences partners and patients. We have built this ecosystem over many years as it includes assets like Relay Health Pharmacy, CoverMyMeds, and RxCrossroads. It allows us to connect providers, payers, and patients together to focus on access, adherence, and affordability solutions. Our two strategic pillars of oncology and biopharma services are not just businesses or products, but fundamentally a suite of solutions that solve long-standing problems in ways that bring more speed, impact, and efficiency. We will continue to invest and accelerate the execution against those strategies, which support the long-term growth for McKesson. I'm confident in the progress against our Company's priorities, that they will enable the advancement of our growth.
Britt Vitalone, CFO
Thank you, Brian. And good afternoon, everyone. I'm pleased to be here today to discuss our fiscal second quarter results, which reflect strong performance and momentum across the business driven by operational excellence and execution against our growth strategies. This momentum can be seen in each of our segments. A summary of our second quarter results and updated guidance assumptions can be found in our earnings slide presentation, which is posted on the Investors section of our website. Let me start with an update on Europe. This morning, we announced that we've entered into a definitive agreement to divest our retail and distribution businesses in the UK to Aurelius for approximately $438 million. The ultimate proceeds from this transaction are subject to certain adjustments under the agreement. Therefore, the proceeds may differ from the announced purchase price. McKesson will continue to operate these businesses and record revenue and income until the transaction is closed, which is expected to occur in our fourth quarter Fiscal 2022 pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals. The assets involved in this transaction contributed approximately $7.8 billion in revenue and $64 million in adjusted operating profit in Fiscal 2021. The net assets included in the transaction will be classified as held-for-sale and held-for-sale accounting will be effective beginning with our fiscal 2022, third quarter. We will re-measure the net assets to the lower of carrying amount or fair value, less cost for sale. We estimate that this will result in a GAAP-only charge of between $700 to $900 million in our third quarter of fiscal 2022. Due to held-for-sale accounting treatment, we will discontinue recording depreciation amortization on the assets involved in the transaction. This impact is not included in the Fiscal 2022 outlook provided today. This transaction provides us the focus to pursue the growth strategies of oncology and biopharmaceutical services in North America. As Brian mentioned, we remain committed to a full exit of our European businesses, which includes announced transactions to the Phoenix Group and Relias, as well as our remaining operations in Norway, Austria, and Denmark. Let me now turn to our second quarter results. Before I provide more details on our second quarter adjusted results, I want to point out two additional items that impacted our GAAP-only results in the quarter. First, we recorded a GAAP-only after-tax charge of $472 million related to our agreement to sell certain European businesses to the Phoenix Group to account for the re-measurement of the net assets to lower accruing amount of fair value, less cost to sell. This transaction is expected to close within the next 12 months. Also, during the quarter, we recorded an after-tax loss of $141 million on debt extinguishment related to the successful completion of a bond tender offer. Moving now to our adjusted results for the second quarter, beginning with our consolidated results, which can be found on Slide 7. Our second quarter results were highlighted by strong operating performance, which included record revenue and double-digit adjusted operating profit growth across all segments. We are encouraged by the ongoing market improvement in both prescription volumes and patient visits, which we observed in our second quarter. These improvements are supported by our strategic agenda, setting us on a path of disciplined growth. In our work to support U.S. government's COVID-19 domestic and international vaccine and kitting efforts continues to contribute to growth in addition to the momentum we have built across the business. Second quarter adjusted earnings per diluted share was $6.15, an increase of 28% compared to the prior year. This result was driven by the contribution from the COVID-19 vaccine and kitting distribution and growth in the medical-surgical solution segment, partially offset by a higher tax rate. Second quarter adjusted earnings per diluted share also includes net pretax gains of approximately $97 million or $0.46 per diluted share associated with McKesson Ventures equity investments, as compared to $49 million in the second quarter of Fiscal 2021. Consolidated revenues of $66.6 billion increased 9% above the prior year, principally driven by growth in the U.S. pharmaceutical segment, largely due to increased pharmaceutical volumes, including growth in specialty products, and our largest retail national account customers. Partially offset by branded-to-generic conversions. Adjusted gross profit was $3.3 billion for the quarter, up 12% compared to the prior year. Comparable adjusted gross margin for the quarter was up 10 basis points versus the prior year. Adjusted operating expenses in the quarter increased 4% year-over-year. Adjusted operating profit of $1.3 billion for the quarter was an increase of 34% compared to the prior year and reflected double-digit growth in each segment. Interest expense was $45 million in the quarter, a decline of 10% compared to the prior year, driven by the net reduction of debt in the quarter. Our adjusted tax rate was 18.8% for the quarter, which was in line with our expectations. In wrapping up our consolidated results, second quarter diluted weighted average shares were 155.8 million, a decrease of 5% year-over-year. Moving now to our second quarter segment results, which can be found in Slides 8 through 13, and I'll start with U.S. Pharmaceutical. Revenues were $53.4 billion, an increase of 11% year-over-year as increased pharmaceutical volumes, including growth in specialty products and our largest retail national account customers were partially offset by branded to generic conversions. Adjusted operating profit increased 12% to $735 million, driven by growth in the distribution of specialty products to providers and health systems and the contribution from COVID-19 vaccine distribution. The contribution from our contract with the U.S. government related to the distribution of COVID-19 provided a benefit of approximately $0.28 per share in the quarter, which is above our original expectations. In the Prescription Technology Solution segment, revenues were $932 million, an increase of 40%, driven by higher biopharma service offerings including third-party logistics services and increased technology service revenue, partially resulting from the growth of prescription volumes. Adjusted operating profit increased 38% to $144 million, driven by organic growth from access in his year-end Solutions. Moving now to Medical-Surgical Solutions, revenues were $3.1 billion, an increase of 23% driven by increased sales of COVID-19 tests and growth in the primary care business. Adjusted operating profit increased 52% to $319 million driven by growth in the primary care business, increased sales of COVID-19 tests. And the contribution from kitting, storage, and distribution of ancillary supplies for the U.S. government's COVID-19 vaccine program. The contribution from our contract with the U.S. government related to the kitting, distribution and storage of ancillary supplies for COVID-19 vaccines provided a benefit of approximately $0.14 per share in the quarter, which was above our original expectations. Next, let me address our international results. Revenues in the quarter were $9.1 billion, a decrease of 5% primarily driven by the contribution of McKesson's German wholesale business to a joint venture with Walgreens Boots Alliance, partially offset by volume increases in the pharmaceutical distribution and retail businesses. Excluding the impact from the contribution of our German wholesale business, which was completed in the third quarter of fiscal 2021, segment revenue increased 13% year-over-year and was up 9% on an FX adjusted basis. Adjusted operating profit increased 41% year-over-year to a $163 million on an FX-adjusted basis, adjusted operating profit increased 34% to a $155 million, driven by the discontinuation of depreciation and amortization on certain European assets classified as held-for-sale beginning in the second quarter of Fiscal 2022. The held-for-sale accounting in our international business contributed $0.13 to adjusted earnings in our second quarter of Fiscal 2022. Moving on to corporate. Adjusted corporate expenses were $83 million, a decrease of 39% year-over-year, driven by gains of approximately $97 million or $0.46 from equity investments within our McKesson Ventures portfolio. This quarter we had fair value adjustments related to multiple portfolio companies within McKesson Ventures. Compared to fiscal 2021, gains from McKesson Ventures contributed $0.24 year-over-year. As previously discussed, it's difficult to predict when gains or losses on our Ventures portfolio companies may occur, and therefore, our practice has been, and will continue to be, to not include Ventures portfolio impacts in our guidance. We also reported opioid-related litigation expenses of $36 million for the second quarter and anticipate that fiscal 2022 opioid-related litigation expenses will be approximately $155 million. Consistent with the proposed settlement announced in July, we also made the first annual payment into escrow of approximately $354 million during the quarter. Let me now turn to our cash position, which can be found on slide 14. We ended the quarter with a cash balance of $2.2 billion, and for the first 6 months of the fiscal year, we had negative free cash flow of $109 million. In Q2, we completed several debt transactions. In July, we redeemed a EUR600 million denominated note prior to maturity. In August, we completed a cash-funded up-sized tender offer, which resulted in the redemption of $922 million principal outstanding debt. Finally, we completed a public offering of a note in the principal amount of $500 million at 1.3%. These actions align with our previously stated intent to modestly deliver, and to further strengthen our balance sheet and financial position. Year-to-date, we made $279 million of capital expenditures, which included investments to support our strategic pillars of Oncology and biopharma services. For the first 6 months of the fiscal year, we returned $1.4 billion in cash to our shareholders through $1.3 billion of share repurchases and the payment of $134 million in dividends. We have $1.5 billion remaining on our share repurchase authorization and continue to expect diluted weighted average shares outstanding to range from 154 to $156 billion for Fiscal 2022. Let me transition now and speak to our outlook for the remainder of Fiscal 2022. For our full list of Fiscal 2022 assumptions, please refer to slide 16 through 19 in our supplemental slide presentation. As a result of our strong first-half performance and our outlook for the remainder of the year, we are raising our previous adjusted earnings per share guidance range for Fiscal 2022 to $21.95 to $22.55, which is up from our previous range of $19.80 to $20.40. Our updated outlook for adjusted earnings per diluted share reflects 27.5% to 31% growth from the prior year and our guidance assumes growth across all of our segments. Additionally, fiscal 2022 adjusted earnings per diluted share guidance includes $2.30 to $3.05 of impacts attributable to the following items: $0.50 to $0.70 related to the U.S. government's COVID-19 vaccine distribution, which is an increase from the previous range of $0.45 to $0.55; $0.80 to $1.10 related to kitting, storage, and distribution of ancillary supplies, an increase from the previous range of $0.50 to $0.70 as discussed at the recent conference; $0.50 to $0.75 related to COVID-19 tests, impairments for PPE and related products, and approximately $0.49 from gains or losses associated with McKesson Ventures equity investments within our corporate segment year-to-date. Excluding the impacts of these items from both fiscal 2022 guidance and fiscal 2021 results, this indicates 20% to 29% forecasted growth. Let me provide a few additional assumptions related to our guidance. We continue to expect prescription and patient engagement volumes will return to pre-COVID levels in the second half of our Fiscal 2022, which is in line with our original guidance. In the U.S. pharmaceutical segment, we now expect revenue to increase 8% to 11% and adjusted operating profit to deliver 4.5% to 7.5% growth over the prior year. We continue to see stable fundamentals, specifically, our outlook for branded pharmaceutical pricing remains consistent with our original guidance and the prior year of mid-single-digit increases in Fiscal 2022. Our view is that the generics market remains competitive yet stable as our volumes have continued to improve in the September quarter. Our guidance includes contributions related to our roles of centralized distributor for the U.S. government's COVID-19 vaccine distribution. This includes work preparing vaccines for international missions. Our current outlook remains aligned with the volume distribution schedule provided by the CDC and the U.S. government. The current guidance excludes booster shots due to the timing of the recent approvals, as well as vaccines for pediatrics, which have not been approved by the CDC. We will continue to update you on the progress and contribution from this program. When excluding COVID-19 vaccine distribution in the segment, we expect approximately 3% to 6% adjusted operating profit growth. In addition, our investments in our leading and differentiated position in oncology will continue to represent an approximate $0.20 headwind in fiscal 2022. In our Prescription Technology Solutions segment, we see revenue growth of 31% to 37% and adjusted operating profit growth of 23% to 29%. This growth reflects the strong service and transactional trends in the business. Now transitioning to Medical-Surgical, our revenue outlook assumes 8% to 14% growth and adjusted operating profit to deliver 35% to 45% growth over the prior year. As mentioned previously, our outlook includes $0.80 to $1.10 related to the contribution from the U.S. government's distribution of ancillary supply kits and storage programs, and $0.50 to $0.75 related to COVID-19 tests and PPE impairments in related products. Excluding the impacts from these items from both fiscal 2022 guidance and fiscal 2021 results, this indicates 13% to 19% forecasted growth. One additional note related to our U.S. distribution businesses. One of the pillars of our enterprise strategy is channel, the ability to attract and retain the best workforce in healthcare. The labor market remains competitive and we've assumed a modest expense impact to ensure there is continued service continuity through the holiday season and the second half of our fiscal year. Therefore, the guidance that we're providing today includes approximately $0.10 to $0.20 of adjusted operating expense impact for labor investments in our U.S. distribution businesses in the second half of the year. Finally, in the international segment, our revenue guidance is a 1% decline to 4% growth as compared to the prior year. As a reminder, this reflects the impact of the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance. For adjusted operating profit, our guidance reflects growth in the segment of 39% to 43%, which includes approximately $0.38 of expected adjusted earnings accretion in fiscal 2022 as a result of the held-for-sale accounting related to our agreement to sell certain European assets to the Phoenix Group. It also includes our strong performance in the second quarter and the contribution from COVID-19 vaccine distribution in the segment. Turning now to the consolidated view. Our increased guidance assumes 8% to 11% revenue growth and 18% to 22% adjusted operating profit growth compared to fiscal 2021. Our full-year adjusted effective tax rate guidance of 18% to 19% remains unchanged. And we anticipate corporate expenses in the range of $610 million to $660 million. On our May 6th earnings call, we outlined an initiative to rationalize office space in North America to increase efficiencies and support employee flexibility. We've made good progress against this initiative. Based on this progress, we now expect earlier benefits from these actions, resulting in the realization of annual operating expense savings of approximately $15 million to $25 million in the second half of Fiscal 2022, with annual savings of $50 million to $70 million when fully implemented. These savings will be realized across all of our segments. Let me now turn to cash flow and capital deployment. We expect free cash flow of approximately $3.5 to $3.9 billion in fiscal 2022, which is net of property acquisitions and capitalized software expenses. As a reminder, historically we generate the majority of our cash flows in the fourth quarter of our fiscal year. This strong cash flow generation provides the financial flexibility to execute a balanced capital allocation approach, investing in our strategies of oncology and biopharma services, positioning our business for long-term growth while remaining committed to returning capital to shareholders through our dividend and share repurchases. Our investment-grade credit rating remains a priority and underpins our financial flexibility. In closing, we are encouraged by our strong performance in the first half of our fiscal year. The momentum across the business, including our partnership with the U.S. government, positions us to deliver the updated fiscal 2022 outlook provided here today. Finally, we're looking forward to providing additional details on our strategies and the strength of our businesses at our upcoming Investor Day on December 8th. Thank you for your time. And now I'll turn the call over to the Operator for your questions.
Lisa Gill, Analyst
Thanks very much. Good afternoon and congratulations on a great quarter. Britt, I appreciate your comments around what you're seeing as far as wage inflation goes. But one of the other questions we've gotten there as inflation is around freight costs. Can you remind us of how that works between the manufacturer and the drug distributor, and if you will bear any of those costs from a distribution perspective, or is it just the manufacturer that bears that costs? Are you able to pass those on to the customer? Just any color around that would be helpful.
Britt Vitalone, CFO
Yes. Thanks for your question, Lisa. Certainly, we will bear some cost for freight. We've been able to pass that on to this point in time, both our pharmaceutical and our medical businesses. We are responsible for the freight from our distribution locations to our customers. And to this point, we've been able to manage through that without any material impact. And our guidance for the rest of the year assumes that that will continue. We did call out the incremental labor impact, the investment that we're making to make sure that we have continuity through the rest of the year. But as it relates to freight, we are responsible from the distribution perspective.
Michael Cherny, Analyst
Good afternoon. Thanks for taking the question. First of all, the call cut off, so I don't know if you've got a chance to finish Lisa's question on freight. If you would to highlight that again. And then I guess just from my perspective, I don't want to get too far ahead of things, especially with the Analyst Day coming up. But I appreciate all the breakout you have on the strong work tied to all the COVID-related elements. I know one of the questions from guests who will come up is what that means into next year. Given that you outlined some of the benefits that you're seeing specifically this year that all it takes we all hope that don't growth trajectory into next year. Is there any way to think about that 230 to 305, and how we have to think about that as a whole in terms of your overall growth versus what your core business will continue to do?
Britt Vitalone, CFO
Hey, Mike. This is Britt. Thanks for hanging in there. Let me just get back to Lisa's question just to finish that up. We are responsible for the freight from our distribution centers to our customers. To this point this year, we have not had an impact in our financial statements as a result of increased freight and we don't expect any of that in our guidance as well, so just to be clear on that. We did call out for you, investments that we're making in labor in the back half of the year, so that we can ensure continuity for the holiday season in the back half of the year. As it relates to your question, Mike, what we've really tried to do here is provide you some clarity on those items that are related to our distribution of COVID vaccines and ancillary kits, as well as the increase that we've seen in COVID test kits which have varied quite a bit from quarter-to-quarter over the last year. We've tried to isolate those for you so that you can have a good view into the operations of our core business. I would remind you that the first quarter this year was lapping a very low quarter from the prior year, which was really the first quarter post the COVID pandemic. So, the growth that you're seeing this year while strong, includes the first quarter which lapped a very low quarter due to COVID in FY21. We'll provide more detail for you on the core components of each of the segments at our Investor Day. We're very pleased with the performance that we've seen thus far; our core business has performed well. But again, I just would remind you that in addition to that, we did have that low quarter for lap in Q1 of last year.
Brian Taylor, CEO
What Michael mentioned about the vaccine and kitting operation is that we continue to run that operation under the direction of the CDC, following the production schedules they provide. It has certainly been quite dynamic over the past few months. We are ready and will keep running that operation as long as the CDC finds it valuable and requests our services.
Charles Rhyee, Analyst
Thank you for the question. I'd like to discuss Prescription Technology Solutions, which showed significant growth this quarter, and we have increased our full-year outlook. Referring to Slide 4, can you specify which services within biopharma are primarily contributing to this growth? It's clear some of it is linked to prescription utilization, and while we are still emerging from the COVID period, could you provide insights on the growth of these services and which ones may benefit as we continue to move past COVID? Thank you.
Brian Taylor, CEO
Thank you for the question. We continue to see that this business responds to the overall levels of activity related to prescription volumes in the market. The investments we've made in technology service offerings are yielding benefits, and we're experiencing good underlying growth across our portfolio. We've clearly benefited from the recovery in volumes related to the COVID-19 pandemic. Additionally, the policy decisions made by payers regarding prior authorization management are allowing the market to return to pre-COVID conditions and requirements. As more patients begin new prescriptions, our business is well-positioned to facilitate access and adherence to medications, and we will keep investing in this area. We are seeing positive returns on the investments discussed in prior calls, including AMP, and there are also aspects of our business, like 3PL, that we haven't emphasized much but have shown strong growth this quarter.
Kevin Caliendo, Analyst
Hi, thanks for taking my call. I noticed that in the slide presentation, the non-COVID pharma growth estimate has slightly decreased to 3% to 6% from 5% to 8% at the end of Q1. Can you explain what has contributed to this change? I understand that labor may be a factor, but it doesn't fully account for it. Also, could you provide similar insights for med-surg, which is now performing better than what you anticipated at the end of Q1?
Brian Taylor, CEO
Thank you for the question, Kevin. I want to highlight a couple of points. We are happy with the ongoing performance of our U.S. Pharmaceutical segment, which is showing strong momentum. As I mentioned in my opening comments, our continued investments in the oncology business and Ontada have contributed to a $0.20 headwind year-over-year. Additionally, the labor investments we've made in our U.S. distribution businesses have also impacted the growth of U.S. Pharma. In our Medical business, we are pleased with our performance regarding the U.S. government program and the increase in COVID test kitting, reflecting the strength of our Lab Solutions business. We are also seeing good results in our Primary Care business and the core areas of our Medical business, alongside the labor investment mentioned. Both sectors are demonstrating solid momentum. For the U.S. Pharmaceutical business, we are committed to investing in oncology and the labor investment in our Medical business, while continuing to leverage the strengths of our Lab business and the investments made there, resulting in good performance in our Primary Care business.
Eric Percher, Analyst
Thank you. A question on the brand marketplace or maybe brand pricing in particular. I think you've made it pretty clear that the book is no longer tied in a material way to brand price increases. Given the reimbursement and policy debate going on, can you remind us what your view is of what could happen if we saw a change in list prices, particularly a downward change, and how you may or may not be exposed to that?
Britt Vitalone, CFO
Thank you for your question, Eric. I'll address the first part, and then Brian can discuss the policy aspect. We've been evolving our business over the past few years by linking the services we provide to customers and manufacturers with our pricing and agreements. The impact of brand inflation is not as significant as it used to be, and we've discussed this extensively in recent years. Now, regarding the policy aspect, I'll turn it over to Brian.
Brian Taylor, CEO
To expand on the previous comment before moving forward, one principle we've consistently upheld through various industry changes during my time here is that our services offer genuine value. No matter how market mechanisms evolve, we will continue to receive fair market compensation for those services. Regarding public policy discussions, they are as dynamic as ever. The primary issues being addressed have been subjects of lengthy discussions. Our company actively engages with policymakers from both parties on important policy priorities, and we monitor these conversations closely. We consistently advocate for the importance of community-based care, as we believe it offers the best access and quality of care. We have been leaders in various initiatives, such as USAN and value-based care, and we've actively participated in oncology care models that have significantly benefited CMS. The future direction of these matters is somewhat uncertain, but we possess numerous assets, are involved in ongoing discussions, and will adapt as needed. Currently, the issues at hand have already been thoroughly examined and discussed.
Brian Tanquilut, Analyst
Hey, good afternoon, guys. Congratulations. I just have one question. Britt, as we think about the investments in labor that you called out, it sounds like it's a back-half thing. Is it a bonus structure or is it the reset in the wage rates that we should be thinking about as we start thinking about our models for fiscal '23?
Britt Vitalone, CFO
Yes. Thanks for the question, Brian. Yeah, we're just going to guide to date Fiscal 2022. We thought that this was an investment that was important for our frontline associates, for our delivery drivers and others, to get us through 2022 with continuity. We're not guiding anything beyond that. So, I think you'd just take this as an important investment to make sure that our customers have the continued service that they would expect them to constitute a holiday season in the back half of the year.
George Chao, Analyst
Good afternoon, everyone, and thank you for joining the call. Brian, I would like to ask you or Britt about your previous comments regarding your reluctance to pursue any major new business ventures. As you shift your focus from Europe to the U.S., is there any reconsideration of your capital deployment priorities or an interest in potentially larger transactions?
Brian Taylor, CEO
I want to emphasize that our overall capital deployment strategy remains unchanged. We maintain a balanced approach, prioritizing strategic growth that is clearly defined through our identified growth areas. As long as potential initiatives align with these strategies, pass our financial review process, and create shareholder value, we are eager to allocate capital towards them. We also consider returning capital to shareholders through stock buybacks and modest dividend increases. We've identified differentiated assets in strong North American markets that, with proper execution, will yield the long-term growth we seek. Our capital deployment is driven by strategic alignment and financial discipline.
Britt Vitalone, CFO
And I think what you're seeing by our actions is a focus on return on invested capital, really making sure that where we allocate capital, it finds the highest returns in the Company and our actions thus far that you've heard us talk about the last couple of quarters have been focused on investing and moving capital away from lower returning assets to higher returning assets, and Brian's point are right on strategy.
Steven Valiquette, Analyst
Thanks. Good afternoon everybody. So, within the med-surg segment, clearly a lot of variables driving the strong profit growth there. On Slide 10, you mentioned the increased primary care business as one of those drivers. Are you able to comment just on the current level of patient volumes in the quarter, either as a percent of the pre-COVID baseline, either for your customer base or just your assessment of the overall U.S. marketplace for physician patient visits? Thanks.
Brian Taylor, CEO
I will begin, and Britt can add his insights if he wishes. We consider patient visits and elective procedures, as well as the distinction between Primary Care and specialty. Overall, we are satisfied with the market recovery, which has progressed as we anticipated at the beginning of the year. We believe it is continuing to strengthen and that by the second half of our year, we will achieve what many refer to as pre-COVID levels. Therefore, we feel we are generally aligned with our expectations, and we are very happy with the performance of the Medical-Surgical business.
Rivka Goldwasser, Analyst
Yes, hi. Good evening.
Brian Taylor, CEO
Hi, Rivka.
Rivka Goldwasser, Analyst
Hi there. Regarding your last comment about pre-COVID levels in the second half of the fiscal year for the med-surg business, how should we evaluate when we might reach pre-COVID levels for drug distribution? It seems specialty has already reached that point, but what is your outlook for the entire segment in core? Additionally, with the Analyst Day coming up in December, can you provide some details on what we should anticipate for that day?
Brian Taylor, CEO
You want to start with Pharma and I'll take the question.
Britt Vitalone, CFO
Yes. Similar to Medical, we are satisfied with the performance of volumes, which are nearing pre-COVID levels in pharmaceutical prescription volumes as anticipated. As we look to the remainder of the year, we expect these prescription volumes to return to the guidance we provided in May, aligning with those pre-COVID levels. We are observing ongoing improvements in performance and volume across all segments, including both brands and generics. We believe this trend will continue in the second half of the year.
Brian Taylor, CEO
Britt, we're very excited to announce our upcoming Investor Day, which will take place on December 8th in New York City. We likely would have held it sooner, but the past 18 to 20 months have been quite hectic. We plan to bring more members from our management and executive teams who have driven the strong results we've shared with you. This team has been instrumental in developing our strategies, and we want to offer deeper insights into each of our growth strategies and core distribution businesses. Additionally, we will start outlining our long-term growth prospects. We believe it will be a fantastic day, and we hope you can all join us.
Operator, Operator
Next question, please.
Jailendra Singh, Analyst
Thank you. Thanks for taking my questions here. Just wanted to make sure I understand what is in and what is not in the guidance respect to the vaccine benefit. It seems you're not including the benefit from vaccines designated for kids or boosters shot. Is that true on both vaccine distribution benefit and the benefits related to the kitting, storage and ancillary supplies as well? Just trying to understand if you see a reasonable adoption of boosters and vaccine among kids, will that drive incremental revenue in both bottom-line and med-surg?
Brian Taylor, CEO
Your first question has been addressed in my response. We have provided guidance based on the information from the CDC, which does not currently include boosters or pediatric vaccines. Okay. Well, thank you, Sarah. And thank you, everyone for the great questions and for joining our call. I want to conclude my remarks today by just underscoring that we're hosting an Investor Day on December eighth, and we hope everyone will get a chance to join us and tune in, we're going to have our leadership team there. The team that's been responsible for building the momentum and the business, and executing the strategies that have been put in place. We will spend some quality time on our oncology and biopharma strategic growth pillars. I think it's going to be a great day. We're really excited to be with everyone and see you. I also don't want to let this call lapse without thanking the McKesson team for their incredible work and their dedication as we round out the first half of our fiscal year. That's where the real work gets done and I'm so proud of them. So, thanks everyone. I hope you have a great evening.
Operator, Operator
Thank you for joining today's conference call. You may now disconnect, and have a great day.