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McKesson Corporation (NYSE:MCK)

31st Annual JPMorgan Healthcare Conference

January 07, 2013 1:00 pm ET

Executives

John H. Hammergren - Chairman, Chief Executive Officer and President

Jeffrey C. Campbell - Chief Financial Officer and Executive Vice President

Analysts

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Good morning, and thank you for joining us. My name is Lisa Gill, and I am the health care technology and distribution analyst for JPMorgan. I am incredibly happy to have with us this morning our hometown friends, McKesson.

This morning -- well, first let me start with -- for those of you that do read our research, we named McKesson our top pick for 2013. And the reason we named McKesson our top pick for 2013 is really 3 reasons: One, would be the management team; two would be capital allocation; and three, I think that there's a great story here as we get into calendar 2014 as we move more towards health care reform. I am incredibly happy to have this morning the CEO of McKesson with us, John Hammergren. The breakout session will be in the Georgian Room across the hall.

So with that, let me turn it over to John.

John H. Hammergren

Thank you, Lisa. We certainly appreciate your kind comments and also the invitation to be here today. Thank you, all, for your interest in McKesson. My comments this morning are subject to the Safe Harbor statement you see here. I'm not going to read it, but it's available on our website in our printed and filed information.

We do think McKesson is extremely well positioned to continue to drive significant, sustained value creation. We are in attractive markets at the right time. Our mix of businesses make us very well positioned, as Lisa mentioned, as you think out to 2014, 2015 and beyond. What's going on with health care reform, there is no other health care services company that has a type of footprint and exposure that we do to what's going to be needed by our customers, really, across the board.

We do have an extremely strong balance sheet. We have a track record of investing that balance sheet intelligently on behalf of our customers and our investors in a portfolio way, and I do think we have the most experienced and tenured management team in the industry.

We are located just down the street. We're excited we have all of you here in our hometown. Hopefully, you'll pay some additional taxes while you're here. We need the help.

We have been around 180 years. So this company has gone through many evolutions and strategy changes, but the one thing that's been core for us has been health care and in principle, our health care and pharmaceutical distribution business.

We have lots of employees. Unfortunately most of them are not in the state of California. We do report in 2 significant segments, and I'll talk more about those specifically in a few minutes. But I think our trademark over that 180 years has been our ability to think forward and to position our company on behalf of our customers for their success.

As I mentioned, we report in 2 segments, our Distribution Solutions segment and our Technology Solutions segment. Distribution Solutions represents 85% of our overall earnings. Technology Solutions is an important segment for us, but it also -- on a standalone basis, but it also is extremely important because of its ability to influence the selection of McKesson as a distribution partner because of this holistic approach.

We have a very large footprint not only in the U.S. in distribution in pharmaceuticals and medical supplies but also in Canada in pharmaceuticals where we have a leading position.

We've been bolstering our position in specialty wholesaling, with the acquisition of US Oncology. We think we have the most robust oncology offering for physicians in the country.

We have continued to build out our franchise called Health Mart for independent pharmacies. And we continue to expand our comprehensive approach to the solutions that our customers need in retailing.

On the Technology Solutions side, over half of our profits are made up of our payer segment, which provides software and services to our payer customers, the big health plans across the country. We have virtually 25 of the top 25 health plans as key customers.

We also have a very large footprint in transaction processing through our RelayHealth business. Those 2 businesses comprise 50% of the earnings of our Technology Solutions segment.

We also have a very large footprint, obviously, in analytics and in core electronic medical record systems for hospitals and other providers.

We're really pleased with the performance of both of our segments thus far through the year, and I'll talk more about this in a few minutes.

Clearly, our customers are going through significant change. Although we may have settled the election and the Supreme Court decision around health care reform, I think a lot of the measures that are being enacted have yet to take full effect, obviously. But also the meaning of the word, patient-centered medical home and accountable care has yet to be defined, clearly, in the marketplace. Our customers are confused. They're looking for answers and they're looking for ways to collaborate and think about the challenges that they face going forward.

As you know, being health care investors, the fragmentation will probably remain with us for some time. I don't believe that the industry is going to consolidate to monolithic, fully integrated vertically integrated providers and payers, but I do think new models are going to continue to emerge, and that's where real opportunity represents itself for McKesson.

We think about our strategy on 3 broad dimensions: the business of health care, the clinical side of health care and the connectivity side of health care. I'm going to talk about each of these aspects by constituent here in a moment. But clearly, our customers have challenges in all 3 categories and the pressure is only increasing.

We actually think about pharmacy -- we began our world 180 years ago serving pharmacies, and the needs at the time were purely logistics. If you think about the needs of pharmacies today, they have challenges in a myriad of dimensions, not the least of which is to become more important in the health care delivery process. Almost all of our customers are experimenting with -- in pharmacy clinics, other mechanisms to connect with the patient and certainly ways to improve their financial health and their ability to connect with the constituents.

But logistics don't go far enough. Our customers clearly have a business challenge on a myriad of dimensions. McKesson is well positioned to provide all of the connectivity requirements necessary. And in fact, we do so for most of the pharmacies in this country, to provide them with the ability not only to be reimbursed properly but also to connect with the manufacturers; to receive special incentives for manufacturers; to do certain work for them; to connect with the patients; and to most importantly, make sure that those patients remain compliant to their pharmaceutical regimens and increase, obviously, the use of pharmaceuticals as part of their overall health care plan.

We don't believe pharmacy can be left out of a patient-centered medical home or an accountable care organization. If anything, we, in fact, believe that accountable care or patient-centered medical homes begin with pharmacy and begin with the patient being prescribed the right drug at the right time, and that they stay compliant with those drugs during their treatment protocols or during their entire life for certain disease states.

Today, in this country, we use only about half the drugs we should be using to treat Americans. And as this becomes more and more evident through the data that McKesson and others were able to provide to physicians and to other providers, the more likely we are to get an uptake on pharmaceutical utilization.

If you think about that specific metric, we have the ability to double the size of the pharmaceutical industry through just the compliance aspect alone, let alone the demographics and the aging of America, they will also be fuel in this whole cycle of pharmaceutical and health care.

Clearly, health systems are under significant challenges as well. You've seen reimbursements are already being cut. We expect our health systems customers to continue to be under significant pressure on the same dimensions as our pharmacy customers. They have to improve their productivity, their business, their workflow. They have to improve their clinical outcomes. They're going to have to report those outcomes. They're going to be responsible for certain compliance metrics now dictated by the government relative to results and have to report those results. And lastly, they're going to have to connect to a myriad of constituents.

As some of you know clearly, hospitals are pursuing strategies to become more vertical. They're buying physicians, some of them may be experimenting with long-term care and some of them are taking on risk on becoming payers. But regardless of what strategy they pursue, they're never going to be 100% of the health care delivery process. They're not going to own every specialist. They're not going to own retail pharmacies. They're not going to own the MinuteClinic or the Walmart down the street and they clearly are not going to own the patient's life from beginning to end.

Our ability to help our customers think more holistically about health care and to connect these health systems customers to the broader array of requirements will enable them to take risk and to be more accountable for the care of patients in America.

We're the largest systems provider in -- for payers in this country. We understand how payers operate. We understand the systems that are required to take risks and the analytics that will be necessary to make that happen. Those same tool sets are being delivered today at the hospital customers and health systems customers that are interested in taking more risk.

The first thing is to understand your population, to be able to do the right analytics on those populations and to understand where you're best suited to take responsibility, perhaps for patient's entire care process economically, as well as clinically. But it can't be done without the information, without the ability to connect to other constituents, and McKesson is extremely well positioned to make that happen.

If you think about payers, they are under significant pressure as well. Many of them will be here this week, I'm sure. Our payer customers are looking for ways to streamline their back-office operations and to produce more profitability now that the government is involved in controlling their P&Ls and their medical loss ratios. Their administrative waste now is extremely important and they're focused on how can we do a better job of managing what we do best while at the same time providing better care to the patients where we have responsibility. They clearly are working with providers to become more connected. They're also working with providers to share the risk and to in some cases, transition or transfer that risk to providers. But all of this is going to require significant data, big data, and the analytic sources or tool sets that are necessary to source that data and analyze that data to produce a better view of the financial condition of the patient and the patient's payer as well as the clinical condition of that patient and report on that on a regular basis to the various regulators and various employers that are involved.

Significant transition for payers and McKesson's conversation and footprint and codependence with these payers allows us a seat at the table as they think about their strategies.

And last but not least, clearly, our physician customers. As you know, we purchased a company called US Oncology a few years ago that made our relationship with physicians even more intimate. Now this happened to be in the oncology segment. But that intimacy is growing across all of our footprint inside of McKesson. Our customers -- physician customers face the same pressures as the rest of our customers. I have to be more efficient, I have to be better able to report out on my clinical results and obviously improve those results and I have to be more connected to the constituents in my community.

This is only the company in America that has the footprint we do to help our physician on those 3 dimensions and to connect to the patient and stay connected with the patient, particularly if they're going to take on a responsibility for patient-centered medical homes or accountable care or they are going to be part of a larger network of physicians, either owned or independent, that have this responsibility.

In our US Oncology business or our specialty business, we've been able to create a network of physicians where we provide the industrial backbone for those customers, while they own their clinical mission. Now they own the clinical mission, but they don't own it independently, they own it collaboratively across the entire network of physicians. So we have roughly 1,500 physicians who talk about their patient care protocols, and can produce better clinical care results for cancer patients than their competitors and can do so at a cost that's 30% to 40% less than most of their competitors.

That ability to produce better efficiency, better clinical outcomes and better financial performance for the payer results in better financial performance for the provider remarkably. And so it's a win, win, win across the table. We are really excited about the progress we're making in this business. And because we touch every aspect of an oncology office operation, we have an intimate understanding for how we can create value and how we can do a better job of improving our patient care.

These physicians police each other relative to the care protocols and they hold each other accountable for making sure we have best demonstrated practice and less variability in the way we treat cancer in this country. I think that's a great demonstration of our ability to partner with our customers in a holistic way. And that partnership has led to our growth in our independent pharmacy business, Health Mart, which we now have 3,000 stores. That's led to our growth in our payer business and has led to our growth clearly in our hospital business as we continue to become more intimate with our customers and more holistic in our ability to impact quality, cost and connectivity.

I'd like to spend a few minutes talking about our footprint in the physician business. We recently announced our intended acquisition of Physician Sales & Service, PSS, out of Jacksonville, Florida. This significantly expands our reach in our feet on the street. We recently received antitrust clearance for the transaction. We have a few more process steps to go through, but we believe this transaction will close in the first quarter. And we're really excited about it.

The combination of the 2 companies really provides us with an unmatched footprint across the country. As I mentioned, 1,500 people involved in the sale of product to physicians, long-term care and home care. And that franchise, really, I think has proven itself on both the PSS and the McKesson side in terms of our ability to deliver value to our customers.

This additional scale will allow us cost advantages in terms of streamlining the combined operations, which will produce roughly $100 million worth of synergies over the next 4 years. Most of those synergies are a line of sight synergies, not a wishful pie-in-the-sky revenue synergies, but things we can actually put into a business plan and get executed. I'm really pleased with the early progress we've made in identifying the opportunities and reaching out to our PSS colleagues.

This transaction also sets up additional conversations with our customers about these challenges that they face on the business, clinical and financial connectivity aspects of their operations.

Our physician customers today are not necessarily worried about the $20,000 per year they spend on medical supplies. What they are worried about is how do I get into the right network? How do I not get left out? If I'm owned by a hospital, how do I do the job of connecting with that hospital the way that I need to, while at the same time taking responsibility for the patients that I serve? How do I connect to other specialties? And how do I survive in a world where the government is increasing the amount of regulation and requirement on me, both in the way I practice medicine and the systems I use to practice medicine, but as important on the financial aspects of how I run my practice and how I make money? These combined forces in health care really are across the board with all of our customers, and all of them are coming to McKesson every day saying, "I need help." Many times it's expressed by I need a better deal on the distribution cost that you charge me to sell me supplies or you sell me pharmaceuticals.

But our more enlightened customers, with our more enlightened people are able to have a dialogue about the bigger dimensions of their survivability. It's not about a discount on bandaids, and it's not about a discount on pharmaceuticals, it's about solving the problems related to the flow of patients through my practice, my ability to streamline what I do every day, my ability to be fully reimbursed and my ability to make sure that I'm in the right networks and have access to the right patients throughout time.

These conversations are unique, I believe, for McKesson in the distribution business. Because of our broad array of capabilities and services, we have the ability to have this discussion in a way that no one else does. Now most of you are -- if you're investing at McKesson, you're investing because you believe in the distribution business and the 85% of the business that is driven -- or earnings that are driven by distribution. But I can assure you that our technology business not only performs well on its own, but is a huge augmentation to this overall strategy we have with our distribution clients. Our technology business puts us in a competitive position relative to distribution each and every day.

So let me talk a little bit about our financial results. We have a strong track record of growth on the revenue side. We've been able to grow through all different types of cycles, including the economic downturns that we've seen as a society recently. But more importantly, we've been able to leverage that revenue growth into higher EPS growth, and we believe that's one of the most important metrics we can be held responsible for, certainly, on all of your behalves.

It's also extremely important for us to produce cash, and we have a track record of steadily growing our cash flow. And as important to growing the cash flow is how do we deploy the cash flow. I think you've been able to trust us over the last decade to deploy your capital in an intelligent way. We do it in a portfolio way. There is no magic to when and how we do it. It's a -- no magic to when, and the magic really is in how. And I'd like to believe that we have a sophisticated way to evaluate targets. We have a sophisticated way to determine what those targets might be worth and how they might be synergistic with our operations and how those acquisitions can outperform share repurchases or dividends.

On the other hand, we're not so myopic as to think that there's only one way to grow our business, and we have a significant track record of returning cash to shareholders through our share repurchase programs and our dividend. So we do have a strong history of financial performance, and our capital deployment approach, I think, has been very successful.

We had a solid first half to the year. Obviously, we're getting close. We've ended our third quarter, and we'll be reporting those results in January. We're beginning to think about our fiscal '14 numbers, which will begin April 1. But we're so far excited about the first half of this year and our growth of 20% at the EPS level.

So we had great performance in the first half. Our performance has been driven by our great relationships with all of our constituents. Certainly, our customers are extremely important, but almost as important are our relationships with our manufacturing partners, and we continue to build those relationships and continue to find ways to create value that serves both of our needs.

We have a very disciplined cost-management philosophy inside of our company. I think you'll find all of our businesses are focused heavily on bottom line results, but they know it comes through a mix of margin expansion and expense control so that it falls to the bottom line. And we have had a significant opportunities to bring our technology offering up to speed in the last 12 months and help our customers get to their requirements for a meaningful use perspective.

We haven't deployed capital this year on share repurchases, and that's also helped our share count.

So I end where I began. We think we're extremely well positioned going forward. We are in attractive markets at the right time. Our demographics are going to continue to fuel our growth across all of our businesses. Our technology businesses, in combination with our distribution businesses, change the competitive landscape and allow us to add significant value to our customers' success on the 3 dimensions of business health, clinical health and connectivity with their other constituents.

Thank you again for your time and attention this morning. And Lisa, I think we have a Q&A across the hallway.

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Georgian Room.

John H. Hammergren

Georgian Room. So we'd be happy to join you over there. Thank you.

Question-and-Answer Session

Lisa C. Gill - JP Morgan Chase & Co, Research Division

You put together any analysis around your expectations as far as increase in utilization. So if we would look back to Medicare Part D in 2006, we had a really good road map, right? We knew what people should have been using and what they can possibly use. Is there a way to quantify how to think about the Affordable Care Act and what it means for drug distribution?

John H. Hammergren

That's a great question, Lisa. I think that is the question. 2014 is when most of the stuff is going to really kick in, and we think that there will be, obviously, additional growth as a result of not only the lapping of the generic, so-called generic transition, but also because our customers will be ready -- beginning to be more ready to implement accountable care or patient-centered medical homes and taking care of these populations that have been underserved. So I think it's probably premature to quantify what the effect is going to be. I think like Med D, it certainly should be very positive. And this one I think is even broader than just the issue of pharmaceuticals. It will encompass business model changes for our customers, to the payers and all of the providers and the pharmacies. And so one of the things I think that is so attractive about McKesson's position in the marketplace that's evolving like this is that we have an appreciation for all of these constituents. We benefit from just the broad pull-through of medical supplies in pharmaceuticals and specialty drugs, but we also are well positioned to help our customers as this model changes, and that's what I was trying to cover across the hallway here in the bigger room, is that there really is no other health care services company that touches all aspects of health care in such an intimate way. Our systems really are embedded across the board with all of our constituents in this marketplace. And those systems are going to be a requirement in terms of pulling health care together in any of these emerging models. If I'm going to be responsible for a patient's care economically and clinically, I'm going to have to have more visibility to the care that they're being given. First of all, are they on the drugs, are they taking the drugs? And secondly, who else are they seeing? Are they seeing another doctor in Florida? Are they seeing another pharmacy in Utah when they're skiing? What are they -- what is it that they're doing and how do I get an all-encompassing view? And once I get that view, I need to do the analytics on that data to determine whether or not I want to take that population or that patient risk into my business model. And then secondly, I've got to execute against that risk to make money. All of those things require big data, big systems, big analytics and connectivity to make it happen. So we have to do a great job in distribution. We have to continue to service our customers' needs. We have to be low cost. We have to be high quality. We have to be innovative. But that, from my perspective, isn't enough. These additional capabilities are really what our customers are engaging us with today that will help position the company going forward. There's a microphone behind you, if you wouldn't mind using it because this is webcast and it's a big room.

Unknown Analyst

Better Health 2020 is as a corporate strategy for McKesson right now. How do you see that transforming the business for yourselves as well as for your customers?

John H. Hammergren

That's a great question. Better Health 2020 is the architecture under which we have conversations strategically with our customers about where they're going to need to be by the year 2020. I think that the core assets that we have positioned us well to have the dialogue. And the execution phase against that dialogue really is around cloud-based computing, connectivity. Some of our businesses that we're focused in an isolated way like a transaction processing for retail pharmacy is an example. Today there has to be a much bigger information source to that pharmacist than just how much am I going to get paid to dispense this drug to this patient. Our ability to bring more data to that pharmacist and conversely more data to the physician who prescribed the drug to begin with will be part of putting this all together from a connectivity perspective that will allow us to do a better job of treating patients in this country. So really it's about the financial condition of our customers; how do we improve their productivity and their reimbursement; reduce their costs; clinical results, they're going to have to report clinical results. In fact, they've got a whole series of requirements the government has given them that they have to do, not only that they have to do it, they have to prove that they did it and document that they did it to receive their ultimate reimbursement. And then they're going to be compared clinically in a more transparent world in the marketplace. And then they're going to have to be able to connect to people that are outside of their ownership model to make it all happen. And some people have asked me the question of, "Isn't the clinical integration between a hospital and a physician really important?" Well, yes, it is important, but it doesn't end there. If I own a general practitioner as my strategy as a hospital and think that, that's the end of my strategy, I'm probably mistaken. I could not probably buy up all the resources necessary as a health system to take responsibility for a patient entirely. Even great health systems like Kaiser are not 100% -- the patients are not 100% within the confines of Kaiser care. They're going to have to receive care in other places almost by definition. And what kind of care they're receiving and what's that doing to their clinical situation is extremely important data to people like Kaiser who have the economic responsibility. So it's an evolving world, and I think we're extremely well positioned for it. Yes, over here.

Unknown Analyst

M&A. You guys have done an interesting job in buying US Oncology and PSS World. So when you look at the M&A pipeline, is there a lot of interesting active prospects right now for you? Or what do you think about pricing?

John H. Hammergren

The question was around M&A and a compliment about the high-quality acquisitions we've done thus far and how do we think about acquisitions going forward and how do we think about pricing. Jeff, maybe you can take that up a level, and then come down to the question, talk about how we think about acquisitions in general or capital in general.

Jeffrey C. Campbell

Well, I think, John, you've heard us for years talk about our portfolio approach to capital deployment, which means that we pay a dividend, which is reasonable by the broader centers of health care services. But we are very positive in terms of free cash flow. So the majority of that cash flow to the extent we can find good acquisition opportunities that meet all of our financial metrics, where there's a reason we should only asset as opposed to it being owned by independent shareholders, because we can uniquely create value, we like to do those kinds of acquisitions. And we think we have a pretty good track record of finding acquisitions that fit those profiles but are often not necessarily the acquisitions at the forefront of people's minds. US Oncology, John, comes to mind as an example. Perhaps the acquisition we recently did in Canada of some assets of the Katz Group, where we bring a unique fit with the assets we already have and the businesses we understand and can buy things at reasonable prices. When you can't buy things at reasonable prices, and that's a key part of an acquisition-oriented strategy, we return more cash to shareholders. If you look over the last 3, 5, 10 years, the way that's actually worked out in practice as we do about as much share repurchase as we do acquisitions. It's not necessarily a perfect predictor of the future, but it's probably somewhat indicative of our historical approach.

John H. Hammergren

And the question on pricing, I think, we try not to overpay. And so we try to be patient. So there are -- our acquisitions we're making today that we've been evaluating for the 17 years I've been at the company. So I think that if you overpay, there's nothing strategic about the acquisition. That can offset the value, the structure by overpaying.

Yes, over here.

Unknown Analyst

Now that you -- you're now touching the physicians with the PSS acquisition, everybody knows about the consolidation of physician practices into larger campuses or into acute care systems, do you need to go back to your roots and retouch the acute care system?

John H. Hammergren

So the question is now that we've increased our footprint with our PSS acquisition, by the way which has not closed. We hope it will close this quarter, but it has not closed. So I'm talking about futures. Do we need to go back -- now that physicians are being acquired into larger groups or by hospitals, do we need to go back and think about our roots, which was acute care distribution? When we bought McKesson -- when we bought General Medical, which is now McKesson med-surg, that company had 3 prongs on its -- or 3 legs on its stool. It had an acute care business, a long-term care business and a physician supply business. Several years ago, we made a decision that we were not scaled enough in the acute care business and divested it to Owens & Minor. We retained our positions in long-term care and in the physician distribution business. And those businesses actually began to grow very nicely under our leadership over the last several years. We -- when we owned an acute care business, we found very little synergy between the acute care business and the physician business. Certainly from a logistics and a relationship perspective, there was very little synergy. And even when the hospitals own the physicians, we had to manage the relationship out of 2 distribution centers because the pick, pack and ship requirement for a small parcel of gloves and sutures to a physician office versus pallet loads of product to a hospital is a completely different model. So we had separate management teams, separate distribution centers, separate P&Ls and we collaborate to the extent that we could when a hospital owned a physician practice. This physician acquisition activity has been taking place for several years. In fact, if anything I see it kind of waning now. Clearly, the consolidation into big group practices will probably continue, and maybe hospitals will continue to buy physicians. We've actually seen our business grow through this cycle. And what's become evident to me in this cycle is that big physician practices need big partners. So when you have 200 doctors in a building, you have to have a sophisticated customer relationship. You have to put in the systems to help them manage their practices. You have to help them manage their financial affairs. You have to do lots of things that are requirements that a 2 doc practice may not have asked you to do as a supplier. McKesson is extremely well positioned to continue to grow on those major practices. And in fact, if anything, that's where McKesson's strength exist, in its surgery centers. On the acute care side, surely we've had some customers come to us and say, "I'd like to have the acute care pricing for my physician customers that I just bought." And we politely say no and say, "But we can deliver you value for those physician customers in a way that nobody else can and we can demonstrate that value." So we've had very little probably immeasurable amount of attrition in our physician businesses that have been acquired by hospitals. But it causes us to change our model. We have to change our selling model. We have to talk to the materials managers in the hospitals. We have to have relationships in the C-suite. We have to provide reporting and demonstrated value back to those supply-chain managers in the hospitals. We have to earn our keep. But we've been able to successfully modify our approach to the market in those owned situations. And we have tremendous loyalty by the customer. And the last thing I'll say in this is, is that those physician customers may spend $20,000 a year on supplies. It's not a top priority for the health system to try to save 5% on supply expense on the physician they just acquired. What's the top priority is to make sure that physician remains productive, and I get a pull-through into my hospital, that physician's client base. If I screw up their productivity by trying to source Band-Aids through my med-surg distributor on the acute care side, I can't make up for enough cost reduction to offset the productivity loss or of the upset customer I've got who tells the other physicians don't sell out to this hospital because it's a mess. So I'm not telling you that we don't have to change our model. I'm not telling you we don't have to remain competitive, we don't have to prove our worth, we're not asked to stand to a higher standard when hospitals buy physicians, but we've been doing this for years and we've been successful at it.

Yes, in the back of the room?

Unknown Analyst

Is there a synergy opportunity, revenue or otherwise, between PSSI's business and your health care [indiscernible] business in selling it through to the physician practices?

John H. Hammergren

So the question was is there a synergy between PSSI in the physician business and our health care technology business. Clearly, physicians have lots of requirements. One of which is the supply chain, and medical supplies, pharmaceuticals, laboratory supplies, a holistic approach to the things I need to treat my patient. But as important as getting the supplies to the patient, I have to have information inbound about that patient's condition and information outbound about that patient's condition as they go down the clinical care process. So McKesson's RelayHealth business moves that clinical information across the spectrum of care. The second big thing I've got to do is I've got to prove to someone that I did this service. I have to bill for this service in an appropriate way and be paid for it. Once again, our McKesson RelayHealth business provides those financial transactions for our physician office. And we process between physicians and hospitals, nearly $1 trillion worth of claims over our networks last year. The third thing I have to do is I have to stay connected to the continuum of care. I've got to provide information outbound, but I've got to also begin to connect in an accountable care patient-centered medical home world in a more holistic way. And we have the ability to do that for these physicians. Revenue cycle management services, we have a large business that does revenue cycle collections and posting of those collections, receivable management for physician offices. And then clearly, if you talk about an oncologist, we get much more intimate in terms of the way we help them manage their practices and their affairs. So the financial dimensions, the clinical dimensions, the supply-chain dimensions and the clinical dimensions are all a one-stop shop for our physician customers with McKesson. Yes?

Unknown Analyst

What has happened to the pricing on generics post the 180-day exclusivity? Is it still the same model that the company has [ph]? Or is it different?

John H. Hammergren

Jeff, do you want to...

Jeffrey C. Campbell

Yes. So we -- in our guidance that we give for the year, we always talk broadly about what our assumptions are about both the brand and generic price environment. And we really haven't seen a change from our guidance, which was to continue along the track of what we've seen over the last year or 2. To remind all of you, that is a track where if you go back 5 years or so, across our broad portfolio of thousands of generic drugs, we generally saw price deflation every year. That's pretty well flattened out in recent years. Now on drugs within their first 180 days, each drug is of course very unique. There have been a few this year that launched with more dramatic price declines in the first 180 days than we had anticipated. And quite frankly, a few that launched with smaller price declines than we had anticipated. So if you look across all of those many data points, we see the price environment for generics continuing along the trend line that it has been on for the last year or 2, which is much more positive than what we saw 5 or 6 years ago.

Unknown Analyst

John, can you talk about the conversion ratio for switching from Horizon to Paragon and your success rate [indiscernible] are frequently talking about having a pretty high conversion ratio at least what your expectation for it as we [indiscernible] having data right now?

John H. Hammergren

Sure. The question is around a portion of our technology business called Horizon, which is a product line focused on hospitals, principally. In fact, entirely on hospitals. The Horizon product line has a clinical and a financial component to it. And earlier, I guess last year, we announced a transition plan to move those customers from the Horizon architecture in the hospital to the Paragon architecture, which is a lower cost to operate fully integrated Microsoft-based technology. That transition is going about expectations, perhaps a little bit better, more rapid to Paragon. On -- conversely on the other side, we had some losses of Horizon customers that we had not anticipated principally because their ambulatory provider had some difficulties. So the person who had this software for the physician office was not able to implement the product the way that they needed to, even though our Horizon inpatient product was working fine. When they came to us to solve the outpatient problem, the only solution we had for them was Paragon, and the Paragon product wasn't going to be where they needed it to be fast enough. So some of those customers chose to go to a fully integrated outpatient, inpatient clinical environment. But -- so I'd say on the positive side, we've gone to Paragon more rapidly. And the negative side, we had some Horizon customers leave us that were having problems with their ambulatory software supplier and made a transition out of Horizon not because of us but because of that largely. Taking it up a level, our Technology Solutions segment is about 15% of our earnings. As you heard me talk about in -- over the last few questions, it does have import on our distribution businesses, because it changes the conversation we have with our customers about their challenges. On a stand-alone basis, about half the earnings of that segment come out of our payer software business and our connectivity business that we described as Relay. And so this issue of the Paragon hospital, Horizon product line was but a very small segment of what is already a small segment of the corporation. And that business, frankly, the growth in there is probably not going to come out of electronic medical records anymore. It's going to come out of Relay. It's also going to come out of our analytics business, which is very robust. And those products fit with our competitor footprint customers in the marketplace. So I would say that every hospital customer in the country can be a customer of McKesson's. Even if they're on somebody else's electronic medical record, we have the other tool sets that will be necessary for them going forward.

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Any questions?

John H. Hammergren

How about the back of the room, any questions back there before I let you go get a coffee break?

All right. Well, thank you for your interest in McKesson. Have a great day and enjoy San Francisco.

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