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McKesson Corporation (NYSE:MCK)

2013 Investor Day Conference

June 26, 2013 9:00 am ET

Executives

Erin Lampert

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

Paul C. Julian - Executive Vice President and Group President

Mark Walchirk - President of U.S. Pharmaceutical

Nick Loporcaro - President

Marc E. Owen - President of McKesson Specialty Health

Patrick J. Blake - Executive Vice President and President of McKesson Technology Solutions

Analysts

Robert M. Willoughby - BofA Merrill Lynch, Research Division

George Hill - Citigroup Inc, Research Division

Ross Muken - ISI Group Inc., Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Ann K. Hynes - Mizuho Securities USA Inc., Research Division

Unknown Executive

Ladies and gentlemen, please welcome Senior Vice President, Investor Relations, Erin Lampert.

Erin Lampert

Thank you very much. Good morning. Thanks to all of you joining us in the room here in Boston. And thanks, to those of you joining us via webcast as well.

Welcome to McKesson's 2013 Investor Day. We've got a great agenda for you today. I'm really pleased to welcome a broad group of senior leaders from McKesson. We'll start of course with an overview of the company from our Chairman and CEO, John Hammergren, followed by business updates for both Distribution Solutions and Technology Solutions. And then of course, we'll have a financial wrap up at the end. We'll leave plenty of time for your questions, and so let's get started.

Before we begin, I'll put up our Safe Harbor statement. I will remind you that during the course of this morning's remarks, we may make forward-looking statements within the meaning of federal securities laws. You can refer to our website and our public filings for a complete list of risks and uncertainties associated with these forward-looking statements. We will also refer to certain non-GAAP measures. And again, you can refer to our public filings, our website or the appendix in the materials we provided today for a full reconciliation of our non-GAAP financial measures to our GAAP financial results.

With that, it's my pleasure to introduce our Chairman and CEO, John Hammergren.

John H. Hammergren

Thanks, Erin. And I'd like to echo her thoughts and thank you all for attending this morning. We know you all have busy days and things you could do, and we also know you can listen to this online as opposed to being here in person. We appreciate the fact that you actually take the time to come over and visit with us and our team.

As Erin mentioned, we have a great opportunity today to showcase our senior management team and our executives who have been leading our efforts over the last several years, and I think it'll be a great opportunity for you to get a chance to meet them as well.

Over to my left and to your right, our rising stars in the organization. Every year, we try to have a class of leaders that are in the process of continuing to develop in their careers. We typically try to invite them to this event if they happen to coincide from a scheduling perspective with this opportunity, and it's a great opportunity for them to get a view on how this all works and for the Wall Street folks to impress them with your tremendous questions. And I know we'll get at the end here. So thank you for taking that responsibility on.

When I think about investing and being in your seats, I think about how difficult it is for you to make the choices to who you're going to bet on, what industry are you going to pick, what company are you going to pick within an industry and what management team do you think should lead that company. And clearly, hopefully today, you'll get an opportunity to reassess those decisions as you think about McKesson as a place for you to trust the assets that have been given to you on behalf of the people that have entrusted you with that decision.

When I think about our industry, clearly, I think it's a terrific business. Health care is and will continue to be the biggest part of our economy, and it faces significant challenges. The company has been positioning itself against those challenges for the last decade and has been focusing on creating opportunity in a market that will -- that is already growing, but it will allow us to grow even faster than a healthy, vibrant market and frankly, to meet the evolving needs of our customers.

So I think we're in the right industry. I think we're in the right businesses in this industry, and I certainly think we have the right strategy to be successful. We have several executives that are going to be here as I mentioned a few minutes ago, and Erin talked about that as well. Paul's going to talk about our distribution businesses in their entirety. You know Paul. He's been a part of our corporation for 17 years and has been a trusted right hand with me the entire time. I think he's built a great team and you'll get a chance to have some exposure to the team.

Our distribution business in pharmaceuticals is led by Mark Walchirk. Our pharmaceutical distribution business is extremely well positioned to grow in a marketplace that is looking for new solutions. But probably, the most underestimated opportunity we have in the pharmaceutical distribution is the growth of the market overall. For those of you that are new to health care, you'd recognize that pharmaceuticals are usually the first place to go from a patient care perspective. But if you don't look under the covers, you don't realize how much untouched opportunity still exist in this business. We think the pharmaceutical distribution businesses could close -- could come close to doubling over the next decade as people become compliant to the pharmaceutical regimens that have been prescribed by their physicians and stay compliant through their entire care process. That growth engine, I think, will become more and more evident as the information streams come together around patient compliance and adherence to the drug regimens that have been prescribed. So we're really bullish on our pharmaceutical distribution business and feel it's very well positioned.

And Nick Loporcaro runs our Canadian Distribution Business, which you should notice, in our Canadian discussion is a holistic approach to the Canadian health care challenges. And basically, a McKesson in Canada for lack of a better example. People think of McKesson Canada primarily as a pharmaceutical wholesaler, which was and continues to be the strongest part of our business there. Nick has done a good job of building a team around him and has allowed him to take a One McKesson approach the way we have in the U.S., trying to tackle all of the challenges that exist in that marketplace. And he's done a great job in building the assets.

Marc Owen leads our specialty business. We've been building this business for 10 years. I think our business stands distinct from our competitors and that we do have an end-to-end solution, all the way from simple distribution, all the way through to partnering with our physicians in a much more in-depth and significant way that allows us to affect the cost and quality of the care that they deliver.

And clearly, Pat Blake will be up here, who also is a long-term McKesson executive and another one of our trusted partners in this business, and he's been working diligently to refocus our technology business in the areas that are going to be the growth engines for the future and to allow us to be positioned for these expanding, changing needs of our customer set as they go beyond installing electronic medical records to actually having to use those medical records in a myriad of settings and to use the data out of those records to take risk, to manage population health and to do the things that are necessary as we think about the next decade of health care from a technology perspective.

And clearly, our Medical-Surgical business is in the right position as well. Stanton McComb, President in that business, is not with us today because he's busy doing some integration work, but we've really positioned that asset very well to take advantage of what we think is the continued growth engine as people move out of the acute care settings, more into those ambulatory care settings.

If you think about it at a composite level, the strategy is pretty simple. We're trying to help all of our customers deal with the business of health care and increasingly focus on becoming more efficient, more productive and being able to measure their productivity gains in a way that will allow them to deal with an environment where we think their reimbursements will go down 20% to 30% over the next several years. They've got to prepare for that, and they have to be more efficient. Certainly, on the clinical side of health care, from a better health perspective, they have to be focused on how they can be measured and benchmarked against other providers from a performance perspective. And increasingly, they're going to have to be able to move information between sites of care, and health care will be more blended together in these silos. And that connectivity from an information perspective will be critical in terms of their ability to accomplish the 2 objectives of better financial health and better clinical health for our industry.

And lastly, I would argue that our management team has delivered tremendous results over a long period of time. I'm proud of the group of executives that we have here from a performance perspective. Our track record of performance that Erin will review when she gets up here, I release -- I think stands -- makes us distinct, I think, in our industry. And those past results clearly should give you some confidence on the fact that we can manage in difficult times and in changing times and still continue to grow our business.

So I'm delighted to have all of you here. You'll have an opportunity to ask your questions at the end, as Erin said. And once again, I'm really pleased that our executive team has been able to join us here today, as well as our rising leaders over here in the ballpark. So thank you for attending as well.

With that, I'll turn it over to Mr. Paul Julian.

Paul C. Julian

Thank you, John. Good morning, everyone. My role today is really going to give you a broad overview of the Distribution Solutions segment, highlight some of our accomplishments FY '13. As John alluded to, I have several of my colleagues joining me today, namely Mark Walchirk, Nick Loporcaro and Marc Owen, and they're going to talk specifically about their business units and some of the things that they're doing on a day-in and day-out basis to serve our customers and distinguish ourselves in their respective marketplaces. Then I'm going to come back later on and I'll give you a quick overview of our Medical-Surgical business. As John alluded to, Stanton McComb isn't here today because we kept him home so he could be -- continue to work on the PSS integration, which is well underway. And I'll talk a little bit about that in my remarks. And then ultimately, I'll try to summarize what I think is important takeaways for you all.

First of all, the Distribution Solutions segment is made up of 5 businesses. It's U.S. Pharmaceutical business, our Canadian operation, Specialty Health, our Medical-Surgical business and our Pharmacy Systems and Automation. Once again, this past year, we were quite proud of the fact that Fortune recognized us as one of the most admired companies in the United States, and we ranked #1 in terms of wholesalers here in the United States. We did accomplish last year about $119 billion in revenue and about $2.5 billion in operating profit.

Now some of the milestones that I'm very proud of and I think the team is quite proud of is -- first of all, I think our global sourcing capabilities continue to expand, especially this past year with the addition of PSS Medical into the McKesson family of companies. Yet in our U.S. Pharmaceutical business, we generated significant operating cash flow. We ended the year with Health Mart franchisees that Mark is going to talk more about, with over 3,000 of those. We grew our OneStop proprietary generics program 8% year-over-year, and we continued our track record of operating margin expansion.

In Specialty Health, we did add a number of physicians to our network this past year, and we launched the dialysis program. And we were recognized by several payers on an exclusive basis. Again, Mark will chat more about it in his remarks.

In Canada, we also once again had very good generation of operating cash flow. We grew about 10% despite a difficult regulatory environment this past year. And a little above 15 months ago, we acquired the Drug Trading and Medicine Shoppe franchise and the Katz Group, and that integration has completed itself over the course of that year.

Medical-Surgical, we grew revenues 15%. I mentioned earlier we've expanded over global sourcing capabilities here. Our McKesson Brand private label once again grew year-over-year. We have very strong growth in large customers and IDNs. I think that's enabled by our scale in this particular segment. And not only did we complete the acquisition of PSS, but we completed the acquisition of National Rehab, which is a company based in Pittsburgh that just furthers our footprint in the home care market, which is a faster growing segment in the medical-surgical industry.

In our Pharmacy Systems business, we grew our bookings in the independent segment by 58%. We added about 750 new retail pharmacies on 1 of our 3 core operating platforms.

I believe you've heard in the past, you're going to hear again today, that we believe -- I certainly believe that operational excellence is the foundation of the platform from which we're able to be successful with our customers. It drives our overall performance. It drives our value proposition. And I'm not going to go through every one of these bullet points, but I'd highlight a couple.

Our order accuracy and our inventory accuracy is well above 99%. And why is that important? It's because due to those service levels and delivering the right products at the right time for the right price day in and day out enables us to have much more fuller and robust discussions with our customers. Without that, it would be very, very difficult. And you've heard us say over the years, we've been a Six Sigma company now for well over a decade. And again, I think that enables our operating performance, our distribution excellence and ultimately, the operating efficiencies that we gain and share with our customers.

Talk a little bit about sourcing. We do virtually source our products all over the world today, whether it's on medical McKesson private label brand products, which continues to grow. We've introduced our NorthStar private label generics program in the United States several years ago, 7 or 8 years ago at this point, and just this past year, we expanded our private label capabilities by introducing our generic private label in Canada, which is called Sivem, that Nick will talk a little bit more about in his remarks. So a pretty significant footprint all around the world, really spread about across the entire Distribution Solutions segment.

I also want to point out that I think we delivered significant value to our manufacturing partners, whether it's reach, breadth of services, scale or supply chain expertise. When you think about reach, no other company has 1,400-plus salespeople in the medical-surgical market that virtually calls on every single alternate site customer in America.

When you think of breadth of services, our U.S. oncology offering that John alluded to in his opening remarks and the comprehensive nature of those relationships and the service that we deliver each and every day to make that oncology practice and that position more successful.

Whether it's scale -- you'll hear from me today that virtually -- we're fortunate that we're #1 and #2 in every segment that we compete in. And that scale I believe delivers again operating efficiency and value to our customers day in and day out. And then ultimately, our supply chain expertise to manufacturers, where if they need a unique program, whether it's supply chain, cold supply chain capabilities, 3PL type of relationship, our fee-for-service capabilities and our pharmaceutical business, unique offerings that would provide the med-surg manufacturers -- I don't believe any other company has that breadth of that footprint as well.

John alluded to this, we're very fortunate and I'm very fortunate to have a very deep and experienced management team. Mark Walchirk is President of U.S. Pharma, he's been with us over a decade. He's also been formerly the President of our Specialty Health business. Nick Loporcaro has been, again, with us about 10 years, formerly a General Manager of one of our regions in Canada before assuming the President's title. Marc Owen, who I'm sure many of you are familiar with, has been here also well over a decade and is formerly the Executive Vice President of Strategy and Business Development for the entire enterprise. Saul Factor, who's not here today, heads up our global sourcing capabilities across the entire segment of Distribution Solutions. Stanton McComb, who isn't here today, again, has been with us a decade and was formerly the President of our Pharmacy Systems and Automation business. Nathan Mott, who is today our President of Pharmacy Systems and Automation. And Nathan, prior to that, led our Six Sigma efforts across the entire enterprise for a number of years. So once again, a very deep and balanced management team with great experiences within our company and beyond.

And with that, I'd like to introduce Mark Walchirk to chat a little bit about our U.S. Pharma business.

Mark Walchirk

Good morning. Thank you, Paul. Good to be here with everyone this morning. As Paul said, I'm going to talk a bit about our U.S. Pharmaceutical business and really cover 2 main areas: first, talk a little bit about what's going on in the marketplace and some of the trends that we're seeing over the course of the next several years and some of the key drivers of those trends, and then talk a little bit about the value proposition in our U.S. Pharmaceutical business. Because although certainly we're very focused on operational excellence and the day-to-day elements of the supply chain, we have a broad set of products and services that we bring to bear for our customers to help them, as John indicated, solve their business problems.

So let's first take a look at some of the trends that are facing the industry today. As you see here, this is really a look at the growth rates in the U.S. pharmaceutical industry. And really, over the next several years, we're seeing growth rates in the 2% to 4% range, which is slightly ahead of what they've been over the last couple of years and back to some of the levels that they were previously. And there are several key things that are driving both the positive and also some of the downward pressures in terms of the growth rates. And just to highlight a couple here, certainly, just demographics are going to continue to drive growth in the U.S. pharmaceutical marketplace. Aging population, more people in the system and just the general demographics are very -- certainly a positive trend. Specialty products, Marc will talk a little bit more about that. But just given the high nature of the price of those drugs and the launch activity taking place with those drugs, that helps to fuel the growth. And certainly, we expect the drug pipeline to continue to show moderate improvement here over the next several years. And as those new drugs are launched, obviously, that helps the marketplace as well.

Some of the factors that are impacting the growth from a negative standpoint, certainly the continued brand-to-generic conversions. We'll talk a lot more about that this morning. Obviously, that puts pressure on the revenue line for us. But certainly, generics are a big contributor to our overall profitability, so that's really a positive as branded generics continue to evolve. And I think in general, just the overall cost containment in the marketplace will continue to put some pressure on the growth. But overall, we see the market growing in that 2% to 4% range over the next several years.

So to break that down a little bit further into really the 2 kind of key categories, brand and generic products, and first, as you'll see here on this slide, we purposely left out 2012, which was kind of a unique year, and we'll talk about that more here in a second, but this is really just designed outline as we've broken down the brand and generic growth rates over the next several years. And so as you see, the growth rates, specifically in generics, although slightly below what they have been historically, still very positive growth that we expect in the generics marketplace over the next several years, which is obviously a big, big contributor for McKesson.

So more specifically now around generics and getting back to 2012, which I'm sure many of you are very aware was really a historic year in terms of launch activity, but really, the highest on record, and obviously, as a result, 2013 is one of the lower years on record in terms of the launch of generic products and brand-to-generic conversions. The key point I think for this slide really is as we look ahead over the next several years, we're expecting really a very solid launch activity as you can see kind of the combination of the 4-year period. Actually, more significant than the period previous from 2007 to 2010. And so obviously, again, this is an important driver for McKesson, and this is a very positive trend that we see coming over the next several years. The one thing I would say is, however, that -- as you know, the timing of generic launches is not an exact science by any means. And so to the extent that things can shift, move up a year or back a year, that can obviously have a pretty significant impact on some of the numbers that you see here. And so obviously, we continue to update this based on the market intel that we have.

Now shifting a little bit to kind of the broad value proposition within our U.S. Pharmaceutical business. And again, really, the core of our business is distribution and supply chain excellence. But certainly, as Paul indicated, the quality and efficiency that we bring to our customers gives us the opportunity to talk about other assets and products and services that we can bring to the marketplace. So I certainly won't go through all of these here, but let me give you just a couple of quick examples.

So first within our health systems side of things, or really the large IDNs, integrated delivery networks. So we have great relationships with a lot of different customers obviously in this area. And one specifically out of the West Coast that I would highlight, where we have a very unique supply chain relationship -- they have their own supply chain, so we work with them on that. We've helped them with their outpatient pharmacy strategy. We help them ensure that they can manage the inventory associated with 340B drugs. And so we have a lot of services and technology that we can bring to bear for our customers to, as John mentioned, help them solve their business problems.

Another example would be in the retail national account arena and a large regional chain up in the Northeast, where, as Paul said, we started really with just the core distribution business in the day-to-day pick, pack and ship. And really, the quality and efficiency that we're able to deliver to this customer allowed us to have a different conversation about we could become more of a business partner for them. So over the course of the greater-than-20-year relationship that we've had with this customer, we've put our pharmacy information system into their operation. We've helped them build a Central Fill operation, and we continue to innovate with them to again help them solve their business problems, and the key being here is we want to be a valuable business partner to our customers. Not just a distributor, but a valuable business partner.

One other element that you'll see throughout all of these customer channels is really generics. And we're very proud as we've been able to grow our generics business, that we've been able to bring value across the different segments.

And maybe to talk a little bit more about that specifically. So this is a real important element of the supply chain, and we believe that we bring great value to the manufacturers, certainly as well as to the end customer. And from a manufacturer standpoint, it's really about reach and scale. And obviously, we can help them with the efficiencies of their production capacity given the reach that we have to our customers and really the scale that we can bring from a purchasing standpoint. And for our customers, that scale is obviously very important as well. And really, the scale that we have, the global sourcing capabilities that we've developed over time, allows us to bring great value to our customers, help them with unique inventory management programs. And also, our NorthStar private label.

So some of you may be aware of NorthStar. Paul indicated this has been -- become a very important part of our generics business. It's a private label program for generics. It's something that's been in development and execution now for over a decade and I think is a great example of innovation in terms of taking an opportunity and building it over time and really turning it into a meaningful part of our business. And really, the key here is that we've just gone further back in the supply chain to have really more impact and leverage and control over the generics products.

And one -- another key benefit of the NorthStar private label program is that it's really allowed us to broaden the mix of customers that we're selling generics to. And again, as a result, we've had very good success here. And certainly, we will continue to invest in NorthStar, in our global sourcing capabilities, to bring more products to market.

Paul touched a little bit about -- on some of the things that we do to bring value to the manufacturers. I just want to bring one specific example that I think is a real differentiator for us within our distribution business. So you might have seen on an earlier slide, we just recently opened up a new 600,000-square-foot distribution center in Olive Branch, Mississippi. And actually, one of these leaders here that John mentioned earlier, Chris Smith, runs that operation for us. And we call this our national redistribution center. And really, the core of this is a hub-and-spoke strategy around distribution, and we believe that this is something that really differentiates us not only for the manufacturer, but certainly for our end customer. It allows the manufacturer to be much more efficient in terms of managing their supply chain, and we believe that it allows us to have industry-leading service levels and inventory availability. So real important part of the value that we can bring to the manufacturer.

We also bring tremendous value to our customers. And one in particular that I would highlight is our independent franchise or Health Mart. And Health Mart has been really a fantastic story for our pharmaceutical business over the past 10 years. And back in FY '07, if you go back even further, when we launched this back in 2004, we had about 250 stores. And we've grown that to close to 3,000 today, and it's probably over 3,000 today because we're literally adding stores every week. And the way I think about Health Mart franchise is really, we are kind of like the corporate office for a virtual chain of over 3,000 independent drugstores. And so we allow these drugstores to maintain their independence, which is very important for them, but we also give them the advantages of scale, of being part of a broader network. And so things like helping them run their business from an operational standpoint with our Six Sigma resources. We're helping them become more productive and efficient by bringing pharmacy automation into their stores. Also, really to help them with their -- with an identity so that they can be viewed as a leader in the community under the Health Mart brand. And certainly, bring in the scale that McKesson brings to the marketplace so that they can obviously buy competitively and remain competitive in their marketplace. And finally, to help them with the reimbursement challenges that they face. Very hard for an independent drugstore to manage all of the challenges and changes in reimbursement. But as a group of over 3,000 stores, we can help them do that through our Access Health Reimbursement Solutions Group. So a real important part of our value proposition to the independent pharmacy.

And really, to close, I think it would be -- I'd be remiss if we didn't talk a bit about our people. And frankly, I brag a little bit about our people. We have over 6,000 associates in our U.S. Pharmaceutical business. We really partner our associates with tremendous technology and our distribution network and a real clear focus, as we've discussed and you'll continue to hear, on operational excellence. And that combination of factors, we believe, really results in what we feel is really best-in-class inventory accuracy, best-in-class quality and ultimately, best-in-class service to our customers. And it's really through that focus on operational excellence that we bring that value, and it allows us to have a deeper conversation to continue to become more and more important business partners to our customers.

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

Nick Loporcaro

[French] Oh, Erin, you said I couldn't do it in French. Okay. Sorry. I thought I could get away with that. Thank you. Thank you for having me and giving me the opportunity to talk to you about McKesson Canada. As John mentioned, I guess we're sort of the microcosm of McKesson in Canada. So I'm going to start with an overview just to kind of set the stage on the Canadian marketplace and the pharmaceutical market in Canada. About a $22-billion market in Canada. 88% of it goes through the retail channel and 12% through the hospital channel.

And in Canada, contrary to popular belief, not 100% of pharmaceuticals is covered by the public program. It's -- actually, about 55% is reimbursed through the public sector and 45% either through private insurance or cash reimbursement. And when you look at the Canadian landscape, the federal government is tasked with a drug review, as well as policy and going down to the provinces and the 10 jurisdictions to decide on what gets into the formulary and how it gets reimbursed, at what cost level. And then you have the private insurers that follow suit along the lines of what each jurisdiction has decided from the public sector.

When you look at generics in Canada, and you'll notice, over the last 7 years, generic substitution or generic penetration has been increasing steadily. And if you look at trends and regulatory changes as of late, we expect this to continue. Just recently, the Québec government, second-largest jurisdiction from a pharmaceutical spend perspective, has dropped what was referred to as the BAP 15, which gave brand an additional 3 years of price protection. So that was just recently dropped. And we're also seeing private insurers now imposing a -- not respect or not reimbursing the no-substitution prescriptions that are coming out of certain physician offices. So we do expect the generic penetration numbers to continue and that trend to continue to increase.

As Mark mentioned, similar to our U.S. colleagues, very broad value proposition here. We're the market leader in Canada. We believe that our scale, our efficiency, our comprehensive set of solutions makes us the provider of choice. If you look at our retail sector, we service over 8,000 pharmacies every day and deliver sometimes twice a day to several of these customers.

Our web-based ordering system, PharmaClik, the most widely used electronic ordering system in the country, really facilitates the managing of inventory and ordering for our customers, allowing them to minimize the inventory they have to carry.

We look at the generic formula, I'm going to speak about Sivem a little further on in the presentation, something we've been very successful with. And from a retail services perspective, running programs not only for our own banners but helping our other independent customers, as well as some of our chain customers with some of their programs.

And the government institutional space, again you see here 93 integrated health networks and 1,350 hospitals that we service every day with a full line of different offerings to them as well. And on the manufacturer side, Paul mentioned earlier we've become a partner of choice as well in the programs that we can help them deliver to community pharmacy, as well as helping them with their hospital distribution and programs that they've been introducing there. We look at adherence programs, something that we've been very instrumental in helping our manufacturer partners introduce into the community pharmacy space. We're seen and have been a partner in the sense of becoming a conduit for them into that space, specifically for the brand manufacturers who have not been very close to retail pharmacy. They see us as a very instrumental player in helping them get that reach and implementing their programs.

On the infusion services side, I'll speak a little later about our specialty business and some of the progress that we continue to make there. And I'll speak specifically to some of the infusion services that we have going on.

So if you look at this math, you'll see 16 distribution centers across the country with 13 offices. We're coast-to-coast. We cover every corner of the country, whether it's rural, metropolitan areas. We cover them all and at the same frequency level. Paul mentioned our operational excellence. You saw 99.97% order accuracy and our picking errors at 0.023%. Constant focus on excellence. We use Six Sigma everyday from an operations perspective. And again, off of what Paul said, we do believe that's what gives us license to go back to our customers, as well as our manufacturer partners and being able to extend on what we already do with them and introduce different programs and helping them progress in their business.

As you look at the Canadian landscape as well, we do have self-distributed retail chains. So this is from the wholesale perspective on what we cover.

Global sourcing. Mark mentioned NorthStar, Paul mentioned Sivem. We have launched a private label generics program in Canada. We did the initial launch in the Québec marketplace. Phenomenal results from a compliance perspective. Our customers have taken on to this program quite favorably. And the crux of this really is service level, our ability to make sure that we have not only order accuracy with fulfillment. I can tell you, we've mitigated the majority, if not all, of any shortages on the SKUs that we carry in this program. So our customers have been very pleased with initial results here. We are looking at rolling out in the rest of Canada over the next few months as we progress with this program.

And we haven't stopped there. With our retail banner groups, we've launched a private label and private brand programs on OTC and consumer products as well. One of the things I didn't mention on the last side is we are a full-line distributor in Canada. So we do Rx, whether that's brand generic, OTC, as well as consumer products. We have a variety of different DC structures across the country, depending on geography and demographics.

Our banner business. As you're aware, about 15 months ago, the acquisition of the Drug Trading group and Medicine Shoppe franchises. I can tell you, I'm very pleased with the integration of that business. It's been a great success from a cultural standpoint, a business standpoint, customer perspective. We've been able to integrate that business quite rapidly, to bring it over and partner up with the rest of our banner businesses across the country. And that has put us in a position right now to be the #1 banner management group in Canada by store count. You see over here, over 1,700 stores and increasing daily. So we've got Proxim and Clinique Sante in Québec. We've got ARP and FHCP in the rest of Canada; and then you've got our Medicine Shoppe, I.D.A. and Guardian banners.

Along the lines of what Mark mentioned, we see ourselves as being the corporate infrastructure for independent pharmacy. So we can aggregate and bring that leverage to the independent pharmacy, allow them to compete, as well as now, as you hear about some of the regulatory pressures and the expanded scope of practice, we can make the necessary investments in automation and processes and bring the solutions over to our independent partners so that they can not only compete and -- as I've often said, not only survive but thrive in this marketplace.

As we look at our specialty space, fastest-growing segment for us. We are in a leading position and have recently made some investments in this space in the infusion clinic arena to continue to strengthen our lead here. About 8 years ago, we got into the specialty space, primarily specialty distribution, biologics. We've successfully taken our learnings from that business and started creating specialty community networks where we now have access to the rest of our partners and be they chain or independents. What we do in working with the manufacturers is we, in essence, become the group -- sort of the OneStop shop in qualifying the partners that are going to take part in the program. So the manufacturers find us very attractive. And since we've launched this, we've had several other requests from several manufacturers across the spectrum here asking us to look at again, as I mentioned earlier, being this conduit into retail pharmacy and how we can expand on these programs.

On the infusion services side, we made some recent investments. We now have over 70 infusion clinics across the country, primarily focused on Remicade today. But as we look at some of the market changes, anticipate more and more outpatient programs coming from the manufacturers and even the public health sector, looking at sending some of these programs through the outpatient clinics. And so we believe we're very well positioned to take advantage of that when it comes.

On the manufacturer program side, adherence, compliance programs are very big today. And at the risk of repeating it again, being that conduit into retail pharmacy, we've been able to show the manufacturers how we can leverage and really get adherence upstream in the product lifecycle and help on the continuum of care.

So to wrap up, I just wanted to give you an appreciation of how we look at health care and the pharmaceutical space in Canada a little more holistically. And we've kind of labeled this our 3 ecosystems, and this is sort of living in this symbiosis of how do they feed into each other? And sort of a rule of thumb that we apply here is if it's not delivering specifically to a P&L criteria that are transcending value into the other spaces here as we feed into, and our guiding principle here is we keep the patient at the middle of everything and ideally within the community. So as we go out to our manufacturer partners, as we go out to our independent or chain customers and other stakeholders in this space, be that at the public or private payer groups, trying to show them again that there's a true value proposition here in leveraging community pharmacy and better patient outcomes. And our believe is as we stay focused on that and we go wrap these solutions and services around the community pharmacy, we'll continue to thrive. And what we don't loose sight of is our customers need to be successful to continue our success. And so as we look at being focused on those better patient outcomes, this model has served us well, and we continue to get some great success from this.

So I think that's my wrap for McKesson Canada. I'd like to introduce Marc Owen to come and talk about specialty.

Marc E. Owen

Thank you, Nick. Good morning. I thought I would begin by trying to explain what we mean by specialty within the context of McKesson Specialty Health since specialty is a word that is used in so many context in health care and often a little confusingly. So what we mean by specialty, McKesson Specialty Health, is that group of businesses that we have which helps specialist pharmacists -- specialist physicians, sorry. And those would be oncologists, those would be rheumatologists, those would be urologists, those would be any physician practicing in the community setting that really is a specialist organization. We see that market growing by about 4% over the next several years. And that's really driven by 3 main things. The first is an increase in cancer care and cancer cases. Cancer, as you know, is a disease of -- which increases with age. And as that happens, the incidence of cancer goes up, and we anticipate new cancer cases rising by maybe 2% to 3% a year over the next several years.

Growth from new products in cancer. The U.S. Oncology Network and the Research Network there has been involved in bringing about 46 new products to market over the last several years. And as we work on new products and as we work with our partners in manufacturing, we see a very nice pipeline, a good pipeline in the cancer space. And so we would anticipate that, that would in turn lead to some growth in this market.

And then finally, we're seeing strong growth in other specialties. The last year or 2, we've seen strong growth in ophthalmology, and we continue to see growth in other specialties as some of the injectable and biologic drugs transcend pharmaoncology into some of these other spaces. So overall, we see good growth, about 4% over the next several years in the -- in what we've defined as our specialty market.

We have a very broad value proposition to physicians in this space. Let me try and give you a sense of the world in which a physician lives today. Physicians today have reimbursement pressures. They have pressures on where are my referring physicians going, where is my patient flow coming from. They have to deal with IT infrastructure and the requirements of Meaningful Use. They have to deal with all the other regulatory requirements that are around them to do with HIPAA, Meaningful Use, ICD-10. They have to deal with the payers that want them to move from a fee-for-service environment into a value-based environment. And then they have to deal with the relationship that they have with the rest of the health system in their local geography.

All of those things are putting a lot of pressure on physicians. It's not an easy place to be if you're a -- whether a 2-person practice or a 50-person practice. That is an environment where they need help.

What we do is we bring that help to them, and we partner alongside them so that we bring everything that they need in order to be able to focus on the clinical practice that they were trained to do and allow us to be able to take advantage and take care of everything else for them. So we provide them with managed care support. We provide them with our IT infrastructure. We provide them with help on their relationships with local hospital systems. We provide them with help on their reimbursement and where they're going on the payer side. So we really do have this broad set of things, and we do partner very closely with the physicians to enable their practices, both to survive and thrive in this changing environment. Because we have that deep relationship with the pharmaceutical, with -- sorry, with the physicians, we, in turn, have very deep insight into what drives practice. Not only what drugs are used, but why are they used, when are they used, who uses them? What can we do to help? And we have a depth of insight that we can bring to the manufacturers, both in the clinical trial space, as well as on market, to be able to help the manufacturers optimally position their products within what is clinically appropriate for the patient. And that depth of knowledge that we have from the practices, we then translate back into really helping the manufacturers with what they're trying to do. And I'll talk a little bit more about payers down the road. But again, as we do that, because we have this depth of knowledge on the physician, because we're so deeply embedded in the practices, we can come back to the payers and be able to provide them again with insight into what's happening in the cost of cancer care that they can't get anywhere else. So that really is how the pieces fit together around our value proposition.

Now we do that at scale. We have about 1,000 physicians now in the U.S. oncology network. We have about 3,000 total oncologists. We have about 3,100 multi-specialty practices. And a big part of what we bring to these practices is the core IT infrastructure. We have about 1,700 practices now on our Lynx Mobile platform, which is in between management charge capture and other things. And then we have more than 1,300 physicians today who are on our electronic medical record, iKnowMed, which was ranked #1 oncology EHR for 2 years in a row. And that base, since we acquired US Oncology, it was originally in the US Oncology base. That base has grown by about 64% over the last couple of years. So really, a scale position in the market, the US Oncology Network continues to add physicians, and we continue to grow as an organization.

There's been a lot of talk recently about hospitals, physicians moving into hospitals, that shift generally. And I thought I'd sort of use 2 things to illustrate what we're seeing in the marketplace around this. If you go to Dallas, Texas and you go to Baylor Medical Center, you will see on one side of a street, you will see the T.Boone Pickens Cancer Hospital. If you walk across the bridge that connects them, you will see the Sammons Cancer Center Center. If you are a patient, you will be treated outpatient in one place, inpatient in the other place. You will have no idea, typically. Your care will be seamless, you will have no idea what the affiliations of the different physicians are. If you actually look at it, the inpatient cancer hospital is mostly staffed by physicians employed by Baylor. The outpatient cancer center is mostly staffed, almost exclusively staffed by physicians from Texas Oncology, which is part of the US Oncology Network. We have a very close relationship. The physicians work together on tumor boards. We're joint ventured with the monoproton [ph] facility down in Dallas. We're building a Phase I clinical trial center together, and that sort of -- is not atypical of the kinds of relationships that our practices have with hospitals and health systems all across the country. I could go through a number of very large health systems where we are the outpatient cancer program for them. And so as the industry evolves, we evolve with it. Our expertise is really in managing outpatient cancer, and we can do that. Some of our physicians over the last couple of years have chosen for whatever reason -- a small handful have chosen to go into the hospital settings, employees. More often than not, in those cases, we maintain the management services agreement. We maintain that agreement with the physicians. We continue to manage the outpatient cancer center. We continue to manage their care of the patient. We continue to provide the IT infrastructure, and those physicians continue to participate in our research network and continue to participate in our clinical trials. So no matter what the setting of care is, we know how to manage outpatient cancer extraordinarily well, and those patients will be taken care of and those physicians will thrive with our help no matter where the setting of care is.

We're well positioned to lead payment shifts. So I think most of you are familiar with the shift from fee-for-service to value-based reimbursement. Because we have a common electronic record across all of US Oncology, we know what cancer care costs, we know what the drivers are, we know how it works, we know what causes cancer care costs to go up or otherwise. And so we've been piloting over the last several years, and we started this probably 5 or 6 years ago, but we've been in pilots now with the major payers for a number of years in leading this transition from fee-for-service to value-based reimbursement. We just completed a pilot with one of the major payers in this country. We saved them 30-plus percent in terms of inpatient days. We cut their ED visits by 30%. We saved them more than double digits on their total cost of cancer care.

We're now taking that pilot along with a number of other pilots that we've done and expanding that across the country. The reason this is important is because as we prove that we can deliver value, as we prove that we can keep patients out of a hospital, as we prove that we can deliver better quality care at a better value for the payors, they in turn will say we will send you the patients exclusively. So over the last 12, 18 months, we've seen a rapid rise in the number of exclusive contracts that we have with payers who are saying, "We will send our patients to your network, and we will not send the patients to some other higher-cost, often higher-cost environment in the local geography." So that's really important as we think about this shift from fee-for-service to value-based reimbursement. We really do view it as an opportunity for us to prove the value, because we really do think that we deliver the highest quality care at the best value for the payers.

So when you add it all up, we have very broad expertise across all aspects of care. We don't view our physicians as customers. We view our physicians as partners. They're deeply engaged in what we do everyday, and we really do think about the whole practice, not just about the drug cost but about everything that happens in the practice. Radiation medical, oncology, surgery, the whole piece comes together in what we do for our physician partners.

We have a technology platform that gives us unique insights that not only generates better patient care, makes it easier for physicians to practice, but also helps our payer and manufacturer partners in what they're trying to do. And then we are now starting to take -- we launched earlier this year the -- another specialty, where we're taking that same model and moving it out of oncology and into other specialties. And we will continue down that path over the next several years.

So thank you for your time. Paul, I will...

Paul C. Julian

All right. Well, I'm going to give a quick overview of the Medical-Surgical business for us and then just have some closing comments.

First of all, our Medical-Surgical business over the last several years has grown at a compound annual growth rate of about 8%, which is -- we've been very fortunate, I think, that we've outpaced market growth in this particular business.

This past year, we had rather significant growth of 15%, which, again, we were quite pleased with. Some of the market trends that we're observing in our Medical-Surgical business, and they're kind of coming through some of the other business units that you've heard from earlier, favorable demographic and utilization trends we're seeing. Consolidation of customers, a lot has been discussed about that, again, across multiple segments, as well as distributors, I think, because of our scale and capabilities and expertise. We're well positioned to capitalize on the consolidation of customers in this space, as well as distributors. The market does remain highly fragmented, although. There's still many, many distributors across multiple segments within this segment. And we still believe that the extended care, and in particular, the home care market, remains quite attractive from a growth rate standpoint.

Like you've heard from all my colleagues, the Medical-Surgical business today has a very broad value footprint, a comprehensive set of services, whether it's in primary care, surgery centers, home care, the list goes on. I mean, we not only provide medical-surgical supplies, private branded products at a very good value, lab capabilities, capital equipment in laboratories, vaccines, pharmaceuticals. So we really do offer technology solutions, inventory management capabilities. So a very broad value proposition that we continue to enhance and grow and develop over the years.

A quick piece on the PSS. I alluded to the fact that Stanton isn't here today, and he's -- he's really focused on the integration. We're about 120 days into the integration of PSS in the McKesson Medical, and it's going to be a multi-year process that we've already communicated. I'm quite pleased with the leadership team that have come together from both companies. So Stanton, who was formerly President of McKesson Medical, is now named as President of the combined company. Probably just as important, the former CEO, Gary Corless of PSS, is now the COO, or Chief Operating Officer, of our Medical business. And then the rest of the executive team is a blend of the 2 former executive teams. So we really -- we're very focused on having a balanced executive team within Medical. And we've worked our way down through the management organization, not all the way down yet, but we have names like Regional Vice Presidents and things of that nature of the combined company.

One of the key ingredients to success was salesforce engagement or salesforce retention. We were public that we wanted to retain the sales organization of both companies. Thus far, we are slightly ahead of our business case in that regard. So we're very pleased about that. We are early on yet out of the gate. We are a bit ahead of the business case regarding salesforce engagement. And then ultimately, we had a business case of about $100 million of synergies that we need to achieve over the full year period of integration, and it is a multi-year integration, whereas you've heard in the past that some of our acquisitions have been integrated in a much shorter period of time. And I'm again, pleased to report that we are again slightly ahead of our business case in the first year of this integration.

So the company has a very wide footprint, about $5.5 billion in total revenue, over 1,400 reps, which gives us tremendous scale and capabilities which is second to none in the magical-surgical area.

So as I wrap up -- I opened my remarks that we're very fortunate to be recognized by Fortune once again as a leading company here in the United States, but in particular, the leading wholesaler in the United States. And that was recognition for innovation, people management and financial soundness. We've been able to win that award, be recognized a few times. But not only that, over the last several years, and really over the last decade, McKesson has been recognized only by various organizations such as Fortune, but probably most importantly, by our customers over that period of time, where we've been named Vendor of the Year or Supplier of the Year by several of our customers again. And we work hard day in and day out from an operating standpoint to earn that respect and that recognition.

So in summary, what I hope you'll take away today is the demographics and health care reform will continue to drive demand. For my colleagues and myself, we have a leading market position in virtually every segment that we compete in. Operational excellence is the foundation for what we do. It gives us the opportunity to have more robust, vibrant conversations with our customers where we continue to pull through other value-added services and technologies. We have established over a long period of time, over a decade, a leading sourcing program that cuts across all of the businesses within Distribution Solutions. And ultimately, we have a comprehensive value proposition that combines distribution capabilities, technology and services.

So with that, I thank you for your attention, and we're going to take about a 15-minute break. So thank you.

[Break]

Unknown Executive

Ladies and gentlemen, please welcome Executive Vice President and Group President, McKesson Technology Solutions, Pat Blake.

Patrick J. Blake

Again, welcome back. It's my pleasure to shift gears and take you through a spin of our Technology Solutions segment.

The agenda this morning will be, I'll talk a little bit about our business really from a context of where it fits within the corporation. I also want to spend some time talking about what I think are some real drivers of health IT investment moving forward. I'll spend a moment talking about our customers' worlds and some of the trends that are impacting them now and into the future. And as I do that, I'll profile each of our major businesses and I'll give you a sense of how I think we're extremely well positioned to help our customers navigate in the face of a lot of change and clearly, as health care reform continues to unfold. And then at the end, I really want to spend a moment talking about what I think are some major themes and some areas of innovation that we're focused on today and I think will clearly benefit us in the future.

So let me start by providing a framing for our Technology Solutions business. I believe we have the most comprehensive set of services and we cover the broadest array of customers in the industry if you look at our footprint, such as hospitals and health systems, payers, physicians, manufacturers, retail pharmacies and consumers. And I think this is a real distinctive advantage for our company because if you look at the competitive landscape, most of our competitors actually focus on one customer segment. Perhaps the largest of our competitors may focus on 2 customer segments. We clearly have the broadest customer footprint. And in a world that is experiencing a significant amount of convergence and confluence, where roles are changing by our customers and the jobs that they'll perform in the future, this experience and expertise really allows us to pull from this coverage universe and help us develop solutions to, I think, the biggest problems that will be presented to our customers as health reform continues to unfold. Questions of how do you really coordinate care meaningfully across the ecosystem? As we exited fiscal year '13, we grew revenues 3% year-on-year to $3.4 billion, and that would clearly make us one of the largest health information technology businesses in the industry today.

From a management team perspective, I'll let you look at some of the years of service. But clearly, note that we have a very seasoned experienced and long-tenured management team, both their time within McKesson and frankly, service before arriving to McKesson. If you would take this slide and compare it to what I spoke to last year, you'll notice there's a few differences as we've repositioned some of our priorities across our technology businesses. Specifically, we've expanded some of the responsibility and the capabilities of both RelayHealth and Health Solutions, which has been under the leadership of Jeff Felton and Emad Rizk, respectively. If you look at our EHR businesses, we've combined those with our legacy revenue cycle business, as well as with our managed services offering, and that's now under the leadership of Jim Pesce. Jim, as you can see, has a significant body of experience, leading HIS companies over his career.

Our former RMS business and PPS business is combined with Med3000, a recent acquisition we made in December of last year. That's now under the leadership of Pat Leonard. And our large imaging business, which I'll spend a bit of time talking about this morning, is under the leadership of Kevin Torgerson. Kevin's been leading that business for a number of years, which is based in Vancouver, Canada.

As we exited fiscal year '13, our Technology Solutions business contributed about 13% of the overall corporation's operating profit. And if you were to look at within this segment, the disproportionate share of our operating profit is driven by our RelayHealth business, our Health Solutions business and our large imaging business, followed by our EHR business and our ambulatory services businesses. And I'm going to provide some context of what drives the earnings of the Technology Solutions segment.

Let me shift here to trends. And in previous presentations, I would have described our customer situation as being one faced with great headwinds. I would have suggested they were at a crossroads of sorts. And today, I would describe it as really a customer set in a state of transformation. And that transformation is adding a layer of complexity to each of the customers that we serve, and that transformation is really being driven by kind of 2 macro dynamics, and you've heard some of my colleagues speak to them. The first is on the economic side and the second is on the regulatory side. Clearly, Marc referred to this in some of his comments, reimbursements continue to be pressured and we see that on the horizon for many years to come. We continue to see increasing employment of physicians and consolidation of physician organizations. When you look at reimbursement from the perspective of a lot of experts, one would suggest that our customers have to begin to learn to survive on a Medicare level of reimbursement moving forward. We also know that our customers, payers and providers are experimenting with new care delivery models, the whole notion of value-based reimbursement, trying to align costs with quality and value moving forward.

Today, about 20% of reimbursements are actually at risk or contingent based upon performance. Most of the experts would suggest that over the next 3 to 5 years, it's going to go from 20% to 50% at risk. So you can see that the dynamics and the complexities for our customers will be changing considerably moving forward.

In parallel, you've got a lot of regulatory pressure and change, and that's pressuring our customers from a time, a resource and a just pure energy component. If you think about the things on this list, and Marc also spoke to this, customers are ongoing-ly managing Meaningful Use. They're completing Stage 1, they're readying for Stage 2. ICD-10, we've been speaking about for a number of years, is now within 18 months of actually being upon us. Our customers are beginning to prepare for accountable care organizations and environments, and there is an increasing burden of quality reporting that is an ongoing requirement for all of our customers to adhere to. And at the bottom of this chart, I actually think the patient, or our consumer is becoming much more activated. Patients with their health information, patients who are taking more accountability for their care and who are requiring a much more seamless patient experience across the health care continuum moving forward. So a lot of challenge and a lot of complexities for our customers.

In response to that, in December of '11, we announced our strategy, which we referred to as Better Health 2020, and this is all around 4 critical success factors that we think is really important for our customers to focus upon and develop competencies against as they manage the challenges of health reform and to continue to position themselves well for success.

These 4 factors really begin with the notion of first, maximizing core technology value and that's really making their environments a lot less complex, laying the foundation for a patient-centered medical home or for accountable care organizations. The second is around optimizing performance and quality. This is really about reducing their cost bases over the next several years to actually enjoy a rate of return at a Medicare level of reimbursement. For us, this constitutes lots of different things, but I would suggest one of the underpinnings here is getting really good at data and analytics and beginning to develop actionable insights about one's enterprise moving forward. The third area is around coordinating care. I must have met with 6 or 7 hospital CEOs last week. They're not talking about the 4 walls of their hospitals anymore, they're talking about, broadly, the community and a patient-centered ecosystem moving forward. This is a big departure from how they would've thought of their businesses in the past and finally, is preparing to navigate for complex and evolving payment model changes. Fee-for-service, fee-for-value, lots of things in between, I'll talk to that here in a few minutes.

Let me first highlight our major businesses, and I'll start with RelayHealth. I think this is one of our largest scale businesses and clearly, one of our most strategic businesses moving forward. And it's within Relay today that we have amalgamated what I think are the foundational elements to help our customers through this transformation. It begins with connecting the commodity broadly. It's about taking that patient information and putting an analytical layer against it to develop actionable insights about care delivery and it's about laying in a care management platform that will allow a health coach or a health navigator to manage and coordinate that care across the ecosystem.

If you think about Relay's scale and breadth, I want to describe it in a little bit more detail and why I think we're particularly distinguished in this area. We start with the pharmacy network. For a long time, we've been #1 in the retail pharmacy space as an intelligence switch, RelayHealth. Today, we are connecting, virtually, every retailer and every PBM and what that gives this system really interesting insights around things like medication histories. And when you begin to think about adherence questions and our ability to help our customers solve for that, we're in a very interesting position. And if you look at the number of transactions across our network, just to underscore this major scale position, over 16 billion transactions across the RelayHealth pharmacy network last year.

Our Relay clinical business is continuing to increase in scale. Today, we're connecting tens of thousands of physicians to their hospitals and health systems and millions of patients to their personal health records. To underscore our ongoing growth here, last year, the Department of Defense awarded Relay clinical an award to put in a patient-centered medical home infrastructure for the DoD. That is in the process of connecting 9 million military men, women and service personnel and their families to their local physician and local health care communities. And if it's not yet obvious, we also moved our analytics businesses under the RelayHealth umbrella. We think this is a very complementary set of assets to be alongside of our HIE moving forward. And if you look at our footprint and history from an analytics perspective, we clearly have had a number of products that have been #1 in their markets. And today, we have over a thousand customers using a variety of our analytic products, and that number continues to grow. So scaled business, great leadership position and I think one of the more strategic businesses for us in the future.

We talk about health solution, another very scaled business that has a great track record and a record of leadership with our customers. This is a business that sits really on both the payer side and the provider side of the financial transaction. We automate authorizations, payment and network rules for our customers. And as I've begin to think and talk about value-based reimbursement, you should get the feeling that we feel incredibly advantaged by having that position on both the payer and the provider and the quality of products that we have here to help them lead through this value-based reimbursement transition.

Let me talk a little bit about our product placement. From a payer perspective, we've long been #1 in decision management products, in financial management products and in network management products. If you look at our customer base, second to none in my opinion, both on the commercial, as well as on the public side. 100% of the top U.S. health plans, commercially, are using our products; 100% of the top 10 Medicaid plans are using our products; 90 plus% of the Blues, as well as CMS, the VA and most all states are using our products. On the provider side, we connect over 2,000 hospitals today and over 200,000 physicians. And if you look at the scale of that network last year alone, over 2 billion transactions crossed our networks. So we're in a very good position to understand this complexity and this movement of value-based reimbursement and to help adjudicate that for our customers as they make this transition, moving forward, from fee-for-service to fee-for-value.

Talk about our Imaging business for a second. This is another large scale business where we have great customer footprint and significant customer satisfaction ratings. In our Imaging business today, it covers diagnostic imaging, document imaging, as well as a series of departmental solutions, a lab product, a surgery product and some supply chain products. If you think about our customer footprint for a second, in Imaging, we cover today over 2,800 facilities using our products; and in document imaging, over 1,400 facilities are using our product. From a diagnostic imaging perspective, you can see showing up extremely well in class with #2 and #3 ratings for cardiology and radiology respectively. And this business is one that continues to have a hallmark tradition of high-quality, a nice return on investment profile for our customers and a great reputation for streamlined deployments. And so this business, in and of itself, is extremely important to us because of its size and its consistent revenue and earnings profile, but what it makes it even more interesting to me and to our team is we've got such a significant customer footprint, even well beyond where we might service the core EHR technology to actually sell through our other Better Health 2020 capabilities moving forward, and that's a big part of the focus of our team.

Let me talk about Enterprise Information Solutions. Going forward, we refer to it as EIS. This is where we've taken our Horizon platform and coupled it with our Paragon platform, our revenue legacy cycle products, as well as our managed services offering under the leadership of Jim Pesce. For the last 18 months, we've been talking a lot about the decision that we've made to converge our EHR platforms onto the Paragon platform moving forward. For those of you who are not familiar with Paragon, it is a fully integrated EHR, single-data model and it's built on a very contemporary Microsoft technology stack. And if you look at over the last 10 years, Paragon has been well received in the market, indicative of that is, last year, for the seventh year in a row, we earned Best in KLAS ratings for the community HIS space. Last year, in addition, KLAS introduced a new category, best Overall Software Suite, and Paragon rated #2, actually, behind Epic, who was #1. So we feel extremely good about the perception and the satisfaction ratings of this product in the market today and moving forward. And if you look at Paragon's customer base over the last several years, it continues to change and 25% of its clients are now 200 beds or better.

Also, I just want to pause for a moment to give you a sense that I'm extremely pleased with the progress we're making with the Horizon to Paragon transition in the Horizon base. As we exited it last year, we had many customers commit to migrations and 3 in particular, I want to bring to your attention because they pointed out a number of important aspects about this journey that we are on with our customers. Covenant Health, Knoxville, Tennessee, 7-hospital system, big multi-hospital system, complex clinical user, signed a immigration agreement to go from Horizon to Paragon with us. Concord, New Hampshire was there last week, big regional player, signed an agreement to migrate Horizon to Paragon. And then, Self Regional, which is another interesting account, they were one of our first ACO demonstration sites, recently signed a Horizon to Paragon migration agreement. So we're feeling extremely comfortable with the progress that we're making there and it will continue to be a large part of our focus moving forward.

Business Performance Services, this probably led revenue management solutions last year. So it's got both a service offering, a product offering and it also consists of the Med3000 acquisition that we did back in December. From a services perspective, it really begins with coding, billing and collections. We do that in a scaled way. We do that for lots of specialties, we do that for employed physicians and you can see, we do that across the country. What I think is particularly interesting here is reimbursement continues to get complex and you move away from fee-for-service to bundles and episodes. This activity for our customer begins to be really difficult and they're looking for outsourced solutions. ICD-10 really represents another major element of complexity, so we're extremely well-positioned from a services perspective.

We also, from a products perspective, have an array of practice management and integrated EHR products for the ambulatory setting and with the addition of Med3, we've added some scale but we've also added some capabilities, capabilities in the form of TPA services, network management and other ACO capabilities with that acquisition. So I think our BPS business is also extremely well-positioned.

So let me wrap up and give you 4 vignettes, if you would, of what we're focused on today and what I think will be the top-of-mind, strategic questions for our customers moving forward and frankly, how I think we're extremely well-positioned to help answer those questions for our customers.

The first area is this notion of population health. I would dare say you can't go to a hospital CEO or a leader of a large practice and this not being one of 3 items on their strategic agendas. The world is clearly moving at some rate from fee-for-service to fee for value. Our customers are taking on risk, they are in need of managing populations. In our mind, it really requires a holistic approach and that holistic approach really has 3 core components: the first is connectivity, we like to refer to it as pervasive connectivity, connecting that broad community and exchanging robust clinical data. It might begin with orders and results, later exchanging meds analogies, later exchanging more sophisticated or complex transition of care documents. That begins to form the basis of a longitudinal patient record that allows you to begin to manage care across the community. Number two, we put an analytical layer against that patient data, feed it into our population health manager product. We take that patient data and divide it into clinical registries and from there, we're able to develop some really interesting insights about patients and populations and their use of the system. We're clearly able to determinable who might be frequent flyers to the ED or be subject to a likely readmissions, those kind of actionable insights that is a big notion of population health. It's all about care management and really engaging that patient and putting in a platform that would allow, again, a health coach or a health navigator to develop and manage tailored interventions for that patient. So that's really our notion and strategy of a very holistic approach to population health. It should give you an idea of the kinds of skills and competencies that our customers will need, as well as the kind of technologies that will be required to support moving into that new role as the manager of population health in a community. And so I think we have a distinct advantage. We clearly have a larger scale, HIE, transacting lots of clinical data as we speak. We have long had a history of being a leader in analytics and with the acquisition of MedVentive, it really puts us in a great position to deliver risk management and population health management applications. And for well over 10 years, we ourselves have been running a large scale care management business, both providing technology applications to payers, as well as a service to payers in managing large state Medicaid populations. So I think we're extremely well-positioned. These products and services are both payer- and vendor-neutral so they'll wrap around any type of organization or customer site and obviously, again, I'd underscore our experience. So this is a major area of focus for ourselves and for our customers moving forward.

I talked about improving efficiency and really reducing one's cost bases. Most of the experts would say our customers have to do that to a rate of 15% to 20% over the next several years. Lots of things you can do to improve your ongoing performance. We think analytics is an incredibly important capability for our customers to deliver. I'll provide a couple of insights to 2 such areas in our portfolio, strategic management. This might be a business intelligence product that our customers would consume from us and it would give them a lot of insights into their service lines, which ones are they making money at, which ones aren't they making money at, which one should they be in, which one should they divest themselves from. The other area would be capacity management, really, marrying up and predicting demand to your facilities, your staffing levels and your resources. And this might begin to answer to bottlenecks that you have in your current enterprise, perhaps, in the ED or it might help you reduce the kind of diversions that you're seeing from emergency medical services to your ED. So when you take these kinds of capabilities together -- I was with a customer last week, who has been about a 2-year, I'd call, super user of some of our analytics products. When they started, they were losing $22 million on the bottom line. Today, they're actually earning a $35 million profit, and the CFO would suggest that consuming and becoming a power user of our analytics suite has been a big part of their turnaround and success story. And I think it is something all of our customers are going to have to embrace, that they're going to readjust their cost bases over the next several years to the extent needed.

Let me talk about value-based reimbursement, also a topic that's top-of-mind for our customers and I think one that just had a great deal of complexity associated with it. If you look down, at the left-hand side of this chart, there's a variety of forms of taking on risk from bundles and episodes, to partial or full cap. And the best way for me to describe this is maybe to paint a picture for you of a payer-provider set of relationships from a contracting perspective. The provider may have a fee-for-service relationship with a payer. That same provider may have an ACO relationship with that same payer at the same time. They may also, at the same time, take a total knee and have a bundled payment between the same payer-provider relationship. And from the provider, think of how many payers I'm working with. So the permutations here become extraordinarily complex and that's where, I think, given our history in working both with payers and providers from the management of this financial equation between them, we're well-positioned. From a payer perspective, we've long been a leader in financial management, which I've discussed, as well as with episode management. For 35 years, InterQual has sat between payers and providers to help them collaborate, if you would, on medical policy and medical necessity. And if you look at it from a provider perspective, we sit at a point of care with our Relay financial product, helping providers understand eligibility, who's covered and estimating patient responsibility. And doing that before service is even rendered is going to become critically important moving forward. So hopefully, you sense I'm extremely excited by the complexity that our customers will be experiencing because I think we're one of the few companies that can really help to make that more rational moving forward and to adjudicate in a much more complex environment.

Let me wrap up talking about interoperability. In February, we announced a major initiative with 4 other major HIT companies to form CommonWell Health Alliance. The mission of CommonWell is to really allow patients and their caregivers access to their patient information in a protected, secure and private way anywhere where care is being offered. McKesson's a big part of this. In fact, RelayHealth will be powering CommonWell moving forward. Relay's providing 3 critical platform services: one is answering to the question of patient identity; two is answering consent and access management, who is authorized to have access to my health record?; and three is providing the algorithm for a record storage locator system. Again, taken together, this begins to allow data that's trapped in EHRs to be lifted out, to be moved around and to be made much more actionable. Over the next couple of weeks, you'll hear that we'll add additional members to the founding member class of CommonWell, and we'll also be announcing the first of 2 pilot cities where we'll be unrolling or unveiling the CommonWell technologies with the other CommonWell partners moving forward.

So in closing, I think that we are extremely well-positioned, as an industry, for growth and McKesson, in that industry, is positioned for steady growth. I think that, because the economic and the regulatory challenges that will continue to press our customers over the next several years, technology will have to be part of their solutions, will have to be part of the transformations that they are underway with as we speak. We have large-scale businesses, I think focused in the areas, and in my mind, those right areas are: population health, analytics, value-based reimbursement and interoperability. And as a company, we're extremely well-positioned to innovate and lead and help our customers continue to succeed in the face of some pretty big challenges.

So thank you for your time and attention this morning. And with that, I'll turn the podium back over to Erin.

Erin Lampert

Thanks. Good morning, again. My role today is to provide a little bit of financial context for the comments that you heard this morning. So I'll talk a little bit about our segments. I will talk about our balance sheet and then, bring it all together and look at our track record over a period of time. Then, I'll make a few comments about our fiscal year, the guidance we recently gave and I'm sure you all saw the press release that we issued this morning, just reaffirming the guidance that we issued on May 7.

So taking a step back and putting our performance into a broader context, it's really been grounded in McKesson's customer-centered approach to everything that we do. To the shareholder, it's important to understand that sustained value creation is about delivering value to our customers, day in and day out, as you've heard this morning. And it starts with the fact that we're just in great markets. And demographics and the public policy agenda are going to be continued drivers of growth for the foreseeable future. We're in businesses that are leaders in their markets and as you listened to the remarks this morning, you heard a few common themes: scale, operational excellence, and a continued focus on higher-margin products and services and innovating for our customers across the markets that we serve. We have a great balance sheet and I'll talk about that a little bit more in a few minutes and as you've seen here today, we have a strong and experienced management team with a great track record and a depth of experience across multiple businesses here in McKesson and across multiple facets of health care.

So let's look at Distribution Solutions where we really have a broad value proposition across all of our businesses. Paul and his team again talked about the fundamental focus on operational excellence and really being the best in our industry at everything we do and day in and day out with our customers. These are very scaled businesses, and we continue to build on that leadership and scale by innovating for our customers over the past decade. And you heard a few examples of that this morning. We talked about private label, including our private label generics both in the U.S. and Canada, as well as our large private label business that exists within Medical-Surgical. You heard Marc Owen touched on about the innovative ways that we're positioning our US Oncology physician partners to really thrive in an environment where reimbursement models are going to change. These are just some of the ways that we've built upon the core of what we do in distribution. How has that gone? If you take a 10-year view, you'll see that we have had a revenue growth of 6% in Distribution Solutions. And I've taken this 10-year view because it really encompasses a number of different trends within our industry, as well as in a broader economic environment. So you can see growth here right through the transition of fee-for-service, right through the broader economic downturn that encompassed our fiscal 2008 and then, of course, the influx in generics that we've seen in recent years.

So let's talk a little bit about how that track record on the top line is translated to the bottom line. Starting back in fiscal 2005, we just ended the year with an operating margin of around 141 basis points and consistent with our goal-oriented and performance-driven culture, the following year, for the first time, we issued our initial long-term operating margin goal of 150 to 200 basis points. And over the course of the following 5 years, you saw us make very steady progress in that range. Fast-forward 5 years, and we ended our fiscal 2010 just shy of the high end of that initial range and 1 year later, revised our long-term operating margin goal to 200 to 250 basis points.

How did we get there? And why do we think that margin range is achievable going forward? Well, our road to achieving operating margin expansion in this business is really driven by the items that you see on this page. And while each of these -- while we use each of these different levers, their relative prominence does change over time. So let's think about this chart relative to the guidance that we issued for fiscal '14. It's well-known, and we talked for some time that the lack of new generic launches in our current fiscal year was going to create a challenge. So how have we responded? Well, we took some actions on the cost reduction side, which you heard about when we gave our Q4 earnings call, and then we continue to expand our focus in higher margin, higher growth areas such as the PSS acquisition, which you heard Paul comment on earlier. There really is a core underlying value to what we do in our distribution businesses for our manufacturing partners and for our customers. The efficiencies we bring to the supply chain is really what gives us the ability to make progress toward this long-term operating margin goal.

So just to summarize for our distribution businesses, these are great businesses that really drive the company financially. We have a track record of performance, driven by our ability to execute for our customers, to grow great relationships with our manufacturing partners across the globe and to continue to steadily expand the profits in this business.

So let's turn to Pat's world, the technology business. Pat highlighted the leadership position across our core technology businesses and also how we are uniquely positioned with our set of assets to help our customers connect in this emerging world of health care. One of the important things about this financially is it means we believe these businesses are positioned well in the long term for steady growth. Pat talked about all of the different businesses, and just to be clear, I want to reiterate a little bit about financially how we think about this segment. And when we talk about it financially, we usually put it into 3 broad categories: our payer-facing business, which is known in the market as McKesson Health Solutions; our connectivity business, which you heard a little bit about, RelayHealth; and then the third piece really consists of a number of different businesses that encompass our hospital-facing and our physician-facing business. So you'll notice I'm borrowing here from Pat's presentation, but again, this is an area where I wanted to provide just a little bit of additional financial context. If you think about RelayHealth, McKesson Health Solutions and our Enterprise Imaging business, these 3 businesses really encompass the majority of the economics of our Technology Solutions portfolio and may tend to be stable, steady growth businesses over time. The remaining assets in Technology Solutions are, of course, organized around our newly combined ambulatory software and services business and our electronic health record and revenue cycle business.

So let me just briefly touch on the financial drivers that we expect for this business going forward. At the highest level, we continue to see demand for technology to help our customers manage their businesses more efficiently and more effectively. Our customers are going to need more connected solutions, and we think our strength lies in our ability to connect across health care. As I mentioned, you have a set of franchises and RelayHealth payer and Enterprise Imaging that really make up the large portion of the economics of this segment and provide us with a steady growth profile and platform at the core. You add onto this some of the areas that we're focusing our innovation investments and efforts. You heard a little bit about population health, for example, our data and analytics. And overall, you have a group of businesses and a set of opportunities that are really well-positioned for long-term and steady growth.

So let me move now from our businesses, and I'll speak a little bit about our balance sheet and our cash flow. Clearly, we're in great cash businesses, and one of the things that I'm sure you've heard us talk about frequently is that there can be quite a lot of a day-to-day volatility in our cash flow. So this can create a somewhat skewed view if you're comparing isolated quarter ends or year ends, for example. So when we talk about the cash generation trend, it's important to take some of that daily noise out of the picture and think about it more on an average basis over 7 years. That's why when you look at this slide, we've selected a 7-year moving average, and over that time period, you see a really nice trend in the cash generation of these businesses. And we're very bullish about this cash trend and how it will continue to grow going forward.

For several years now, you've heard us talk about what we like to call our portfolio approach to capital deployment. And what this really means is that we don't have preset targets. At the highest level, we have pretty consistent internal investment needs. We pay a modest dividend, a dividend that we think is competitive, as defined by the broad standards within health care. And that really leaves the majority of our capital to be deployed between a mixture of acquisitions and share repurchases. And if you take a look at that over the last 7 years that we've chosen for these particular slides, you'll see there's really almost an even balance between the cash deployed for acquisitions and share repurchases. That's not necessarily a predictor of the future but just an example of how our strategy has manifested itself over this time period.

So let's talk about each one of these things in turn, and I'll start with internal capital spending. Paul and Pat talked a lot about the many investments we continue to make in both our distribution and our technology businesses to stay ahead of where we need to be with our infrastructure and with our technology to provide the kind of service and quality that our customers expect. Well, that's in the numbers historically, and even if I were to take this chart back a few years from what you see here, you would still see that we spend between $300 million and $400 million a year on internal capital spending. We really don't see anything on the horizon that's going to change this number dramatically going forward. It's really a modest amount if you think about it in the context of the overall cash flow of the company.

So that brings us to our dividend policy and our philosophy on dividends. And a phrase again that I would use is our goals to pay a dividend that's competitive by the broad standards of most companies within health care services. We're not trying to be a purely dividend-oriented company, but I will tell you that this is certainly a subject that we discuss frequently both as a management team and with our board. But at least in the near term, we're unlikely to make dramatic change to what you see as a philosophy here on this slide. That leads, as I mentioned earlier, most of the cash to be deployed between a mixture of acquisitions and share repurchases. And our preference would be to deploy our free cash flow on value-creating acquisitions where we can uniquely bring value, deals that meet all of our hurdles both financial and strategic hurdles and are available at a time where we have the management bandwidth in that portion of our business to really manage them well.

So you see here a 7-year -- over a 7-year period, we've done 44 acquisitions, and interestingly enough by numbers, those are roughly evenly split between Distribution Solutions and Technology Solutions. If you peel that back and look at the dollars, you'll see a little different story and the fact that most of our dollars have, in fact, been focused in Distribution Solutions. And, of course, our Distribution Solutions acquisitions have mostly been about positioning ourselves well within our markets and building upon our scale across all of our businesses. So, for example, Marc Owen speaking about specialty where the acquisitions of USON and OTN really helped us achieve meaningful scale in that business. Likewise, Nick touched on the Katz acquisitions and the strategy to build out our Banner business in Canada. And then, of course, Paul gave us a brief update on the recent acquisition of PSS. Most of the dollars in our Technology Solutions acquisitions profile really come down to Per-Se, and that was particularly important because what that acquisition brought to us were the assets that we think of today as RelayHealth. Most of our other technology acquisitions tend to be small product companies that we, for example, can incorporate into the strength of our channel or companies that bring a unique capability in some of the areas that Pat talked about where we're innovating.

But we're very disciplined financially about our acquisitions, and it's often frankly more difficult to find acquisitions that meet all of the hurdles that I spoke about. So when we can, that's what led us, in fact, to do share repurchase over the last 7 years. And you can see from this chart that, in fact, we've returned nearly $9 billion through our share repurchase activity. If I were to include on this slide the guidance that we've given for fiscal '14 of 231 million shares outstanding, you'll see that over this time period, we've dropped the shares outstanding of the company by almost 25%. And if you think about the next couple of years, that drop in shares will probably continue to accelerate because we're nearly finished working through the option overhang from the late 1990s, early 2000s at this point.

So wrapping up a little bit on our balance sheet and cash flow. Clearly, our cash generation has been very strong. We retained a very strong balance sheet. We think it's important for us to remain a solid investment grade-rated company, and we're right at the top end of where we want to be in terms of our growth debt-to-capital range as we ended our fiscal year '13. We ended the most recent fiscal year with $2.5 billion in cash in our balance sheet, and I would point out that $1.5 billion of that cash is offshore. We have a tremendous ability going forward given the strength of our cash flows across both segments and the strength of our balance sheet to continue to use our portfolio approach to capital deployment to create value for our shareholders.

So how does that all add up? Well, the track record has actually been pretty good. If you look at the last 7 years, we've got a compound annual growth rate on the revenue side of 5%, again, right through recession periods, right through other uncertainties. And we've turned that 5% top line growth into 13% growth on the bottom line. Some years a little bit more, some years a little bit less than that average benchmark but a good track record overall. And certainly, as we think about this time frame, we're pleased that our share price tends to reflect the kind of growth and expansion that you've seen here.

We reaffirmed our guidance this morning. We continue to expect to earn between $7.90 and $8.20 for our fiscal '14. And you can see here a list of the assumptions that we included in our press release on May 7. There's a lot on this chart. I assure you that nothing has changed from that initial release on May 7. When people ask me what are the things that could move your earnings up or down within this guidance range, I really point them back to this list of key assumptions, which are important in the way that we construct our overall plan. It's still obviously very early in our fiscal year, and in fact, we haven't closed the books on our first quarter yet, but there's nothing that we've learned at this point that would cause us to feel uncomfortable with any of the assumptions that you see here. As you know, we don't provide quarterly guidance, but I will make a few directional comments about our first quarter. In the first couple of months of our fiscal year, we've seen manufacture economics on both the brand and generics side ahead of our original expectations. It's still obviously far too early to make the call whether this is purely a timing shift or a change in trend. But we would expect our first quarter earnings to be unusually strong, driven by some of these manufacture economics.

So I'll conclude really back where I started. We operate in great markets where the services, the products, the technology and the solutions we provide make a difference to our customers. We're well-positioned across our portfolio of businesses where scale, operational excellence and our ability of focus on higher margin areas are important. We have the financial strength to continue to invest and grow our company. And we have an experienced management team, including the broad group of leaders that you've seen here today.

So thank you very much for your attention this morning. Thank you for your interest in McKesson. And with that, I'd like to invite my colleagues back up on the stage, and we'd be happy to take your questions.

John H. Hammergren

Well, I hope we found all that interesting. I'm certainly proud of this team not only in terms of their ability to perform but the way they think, the way they behave and their knowledges, their subject matter expertise relative to our industry and the segments that they have responsibility for. Many of the executives have progressed in their career at McKesson in lots of different ways and, over a long period of time, have lots of different jobs and gained tremendous experience and insight into the health care industry, which is benefiting them not only as they think about the opportunities that lie ahead in our industry but also in the way they collaborate with each other and the way they work across the boundaries of our businesses. Clearly, we have also competitors that focus on beating this every day in the segments in which they compete with us. But if we change the game and compete the way our customers want us to compete by adding value in those dimensions of better business health, better clinical health and performance and better connectivity, we think we stand unique and singular in our ability to help our customers against these problems and challenges that they are going to face, which our country, obviously, is facing. So I couldn't be prouder of a team or of a company than I am of McKesson. And Erin, you did a terrific job also of pulling [indiscernible] talking about our terrific results, and you also have a great track record here, as do many of our staff executives who have been doing these tremendous works supporting the line operating executives inside of our corporation. So throughout the company, I'm proud of the performance of our teams.

We'd be happy to take whatever questions you might have. And why don't we begin with Lisa in the back of the room here?

Question-and-Answer Session

Unknown Attendee

First off, let me just start with a broader base question, and that's around sourcing. I mean, obviously, a big agreement has happened between Walgreens and Amerisource. There's been a lot of talk in the marketplace around sourcing and having that relationship with a European player as you talk with the generic manufacturers. Do you think that McKesson needs that, number one? And number two, do you think this relationship between Walgreens and Amerisource changes the competitive landscape at all for joint distribution?

John H. Hammergren

That's a great question, Lisa, and I think it's one clearly that is on our investors' minds and on management team's mind and on the minds of our customers. I think any big change that occurs in an industry like ours, at a level that has happened recently, is going to attract the attention of the industry and the participants in the industry. As evidenced in the conversations that Paul and Mark were having in particular, I think we've been very aware of the need to have global scale. And we've done a great job, as Nick pointed out, in bringing our power across the borders at least in North America in terms of the way we approach the market. But we've also been very global on our ability to source product and availing ourselves of a great knowledge base, I think, of what goes on around the world from a product, price, quality and availability perspective. I think it's unclear what will happen from a competitive dynamic perspective. Clearly, if someone is able to garner a competitive advantage from a sourcing perspective, it will be our responsibility to try to match that advantage and to find unique and creative ways to level the playing field. And secondly, I think it'll be interesting to see, if there is an advantage created, how much of that falls to shareholders and to the companies that are creating the advantage and how much of this, in the form of competition, put back into the marketplace. As you see over the decades that McKesson has been in the distribution business, we've been focused heavily on making sure that our customers get good value from us but also that our shareholders are rewarded through the efficiencies and the quality of our operating teams to drive results and we think set us out unique in our industry. And that evidence is, I think, most noticeable by our ability to grow earnings faster than revenues and our ability to expand our operating margins. We believe that's a sign of a healthy company, a company that constantly focuses on growing gross profit dollars faster than expenses and the ability to grow earnings faster than any of the other lines on the P&L. That remains a priority for us. Clearly, we'll have to react from a competitive perspective should the market price strategies change, and we'd have to continue to focus on making sure that we're availing ourselves of sourcing opportunities that may exist through collaborative partnerships, through additional scale in our businesses, et cetera. And as the guys have mentioned, we've done a really good job, I think, of focusing on that priority for over a decade.

Unknown Attendee

Just secondly, around the CFO transition, I thought Erin did a great job today. Can you talk about candidates that you're looking at? Is it both internal and external, how you're thinking about it? And just timing around naming a replacement to Jeff, which, by the way, did a great job over the last 10 years. [indiscernible] listening today.

John H. Hammergren

Yes. Well, we certainly -- Jeff has been a big part of our success and remains a close friend of the companies. And I'm going to miss Jeff, and I know our team is going to miss Jeff. We do function as a family, so there is a little bit of mourning going on relative to a loss of a great executive like Jeff Campbell. Having said that, we move on, and our corporation has got a great set of resources and the financial teams that will avail us of not only a steady hand on the rudder as we go through this transition but also afford us opportunities to look inside, as well as to open our eyes to what might be available in the perimeter of our businesses in terms of talent. I don't think this will take us very long to fill the role. Having said that, we have Nigel Rees, our Controller, who's totally capable of helping us after his decades of experience and the roles he's had get through this transition period. But I don't think it's going to take us very long to find a high-quality person to fill his shoes. Thank you for those questions. We have one over here. I can't see from the lights, but...

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Yes, John, Robert Willoughby. You seem to be in a few more businesses these days that actually you do have direct interface with the patient, that you do touch the patient. Am I reading too much into this? Or is there more of a focus to disintermediate that caregiver in some cases and get control of that patient relationship as well?

John H. Hammergren

Well, if you guys know Marc Owen, he has been [indiscernible] team as a strategy and M&A executive for a long time, had operating experience before he ever came to McKesson and now is operating a responsibility for one of our faster-growing, more important businesses in Specialty Health. If there's any place where we could point to our strategy relative to getting close to the patient, it probably isn't that business. And perhaps, Marc, you can answer the question not only from a US Oncology framework but also from a McKesson framework, how we think about channel conflicts and potential competition.

Marc E. Owen

I think as you look at the US Oncology business and more broadly than that, we work very closely, we work very collaboratively with our provider partners: the physicians, the hospitals, the health systems and so on. And we certainly collaborate with them. What we're hearing from them is, can you help us engage the patient because they need to be engaged with that patient? So one of the things that we've launched recently is the patient portal that allows us to engage directly with the patients. But again, it's through the practices, it's branded as the practices and it's always done collaboratively with the channels. So I think in general, we tend to do that with the providers. Same thing with RelayHealth when we connect 2 parties or when we connect a patient to somebody else in RelayHealth. And perhaps business is usually on behalf of a provider in the industry. So it really is a collaborative effort across the industry.

John H. Hammergren

George.

George Hill - Citigroup Inc, Research Division

Pat, McKesson is kind of uniquely positioned, as you guys look at the population health opportunity, because you sell into so many segments, the provider segment, the payer segment, all the other health care segment that McKesson touches so well. As you see the revenue opportunity ahead of the company, I guess, where do you see the majority of the dollar spend coming from? And where do you feel McKesson is best positioned to capitalize on that?

Patrick J. Blake

George, good question. I think my honest response at this moment is this is still an emerging place for our customers. Some are experimenting rather actively. Others are watching and waiting. At some point, over the next 3 to 5 years, we think most of our customers will assume risk and manage populations. As I tried to frame out, I think it's just an application that will provide our customers. It will start with connectivity, which will be important to driving the data that feeds the application's population health or risk management applications. And then I do think there are care management platforms and/or care management services. I think it's a little early for me to try to bucket which set of applications or services are going to drive the revenue models for a population health, but at the same time, I'm excited that we have deep capabilities in all these areas and a lot of history in some of these areas that I think distinguishes the company in this space moving forward.

John H. Hammergren

Next question over here.

Unknown Attendee

John, in your opening remarks, you highlighted an opportunity that you think we underappreciate, and that's basically improving compliance and growing the market. It kind of reminded me how past 10 years ago, you had to improve compliance, as pharmacies are buying more generics. It seems that the opportunity now is getting to consumer to actually...

John H. Hammergren

Take the med.

Unknown Attendee

Take the med, right? So when you think about it, right, what is going to drive that change in consumer behavior? Is it the tie-in with population health [indiscernible] business [indiscernible] the analytics with the front-end? How should we think about it? And how should we think about the opportunity? What are the compliance rates today? And where do you think they're going to go in the future?

John H. Hammergren

I think for this question, maybe Pat, you and Mark can take a shot at it. I don't know who wants to go first, but obviously, it's a question of data and influence and who those influencers might be.

Patrick J. Blake

Well, I'll start. As we talked with customers about population health, the insights that they can garner around patients and their medication therapy is incredibly important. In fact, they look at -- if they can manage that early on as opposed to reducing hospitalization, if you would, that drug spend is not necessarily something that's going to take away from that physician's income. So they're very focused on doing the right thing relative to medication adherence. And I think about our assets as a company, as I mentioned, RelayHealth, because of its connectivity to all retailers of PBMs. We have a ton of insight around medication history. Now there are questions that we have to answer relative to our access to that data and privacy implications to that data. But actually, I think we're making a lot of progress on that front and we'll continue to over the next couple of years. And that will have a meaningful opportunity to change the use and the adherence of pharmaceuticals moving forward.

Mark Walchirk

I will just add. I think there's different numbers out there. But it's relatively known that the size of the U.S. market for pharmaceuticals could double with 100% adherence to medication. I think obviously getting to 100% is unrealistic, but certainly, even small gains in adherence and compliance to meds would generate good growth in the marketplace. And I do think -- I wouldn't suggest to have sense of where that's going to be and what the growth rate is there. But as we move to more of a value-based reimbursement model, where health care providers are frankly incented to keep their costs down and it costs you a lot less to incent perhaps the patient to take their meds so they don't go to the emergency room, which is obviously much more expensive, I think those incentive structures continue to evolve from a reimbursement standpoint. I think you could see providers getting more focused on driving adherence programs for their patients, and that would certainly increase the rates per drug use.

John H. Hammergren

John, did you have a question?

Unknown Attendee

Could Pat give us some kind of a projection of your expectations for revenue and operating profit growth in the tech business, say, over the next 3 or 5 years?

Patrick J. Blake

Yes, right now, we project that we would grow at market. Market is probably 4% to 6%. And we have a long-range goal of getting our operating profit to the mid-teens, John.

John H. Hammergren

We have a question over here. There's one more over here [indiscernible].

Unknown Attendee

Paul or Mark, I think you commented that the independent growth rate within your network grew by, I think, 58% year-over-year. Is that correct? And can you just sort of talk about that, like what do you do to bring in -- what are you doing to bring in those independent stores? And given the ABC/WAG transaction, I mean, will that influence your strategy going forward?

Paul C. Julian

Well, I referred to the 58% growth rate in the independent segment relative to our Pharmacy Systems business. So -- and I referred to it as bookings. So bookings, which just means someone has signed up for one of our operating, we have 3 operating systems, grew year-over-year by 58%. That's not necessarily a -- that is not a 58% growth rate within the independent segment. It's all still [ph] by store.

Unknown Attendee

Okay. So that's in the technology piece. Okay.

John H. Hammergren

That's correct.

Unknown Attendee

And then as far as attracting independents going forward, is there any change in strategy given the ABC/WAG deal or business as usual?

Mark Walchirk

Well, I think obviously, continuing to grow our independent franchise and our help from our franchise is a real focus for us. Actually, flying here to Las Vegas for our annual ideaShare where we invite -- we've got over 2,000 independent pharmacy owners coming in for our annual ideaShare event. And certainly, we continue to look for opportunities to grow that franchise, finding those independents that fit well within kind of the model that we have as part of our help from our franchise. And certainly, as things take place in the marketplace, we're going to look for opportunities to continue to grow our business with those customers.

Unknown Attendee

Great. And then Nick, if I can, can you just talk about your success in Canada? Obviously, AmerisourceBergen is choosing to exit that market. Just talk about sort of how you're being successful up there, whereas ABC is choosing to exit.

Nick Loporcaro

Well, we had a brief opportunity to speak about that during the break as well. And I can't speak to what ABC has done or -- in the market. But I can tell you, what we've done and what we continue to do is be very proactive in looking around those corners. None of the margin pressures that we're experiencing are a surprise to us. We've planned for them. We've been very proactive in getting in front of the key players, whether it's the public or private sector payers, and looking at programs. And how do we transition? The reality is the pressure is there. We know it. So how do help those players there? And one of the points Mark touched upon and the question that came up with adherence and compliance as we work and educate these players, is how do we help them save in the short term so that they can reinvest upstream in adherence and compliance and keep people out of the overall health care spend? And it's gaining much more traction throughout an industry equivalent with any CDS 2 weeks ago. And you can see it's palpable now. People are on board. They're getting on it. And so we've been a key player at the middle of that, I should say, at the forefront of pushing that agenda forward. And as I mentioned in my presentation, our operational excellence, what we continue to offer and the solutions that we bring through independent and chain customers and to the payer community have positioned us well to continue what's right.

John H. Hammergren

And I might add. If you think about any buyer of anything, if you don't change the dialogue to broaden the scope of the discussion on value delivered, which you get discussed as price for service, and what our management teams have been heavily focused on is how do we broaden our value proposition to our customer base so we can deemphasize the focus on distribution charges or distribution markups or in the case of Canada, generic price slashing done by the government where they're saying, "We're going to continue to take costs out of health care by reducing the reimbursement for generics." You can't cut generic pricing bound up in Canada to make a dent in the health care burden that this economy is going to have. And what we've been afforded the luxury of having because of our credibility in this market is a dialogue with the regulators and with customers is really unbounded in terms of how to attack health care spending. And we have a discussion about health care spending in the country as opposed to the price for drug distribution or generics. And you bring an argument to the table that can help these people understand that there's a bigger fish to fry, then it really brings in a more complete portfolio of capabilities and deemphasizes the stuff that -- but it's our responsibility to bring these solutions to the market and to educate the customers. So rather than fighting with an oncologist about the price of our distribution service, we can talk to an oncologist about the business of their oncology practice, how do we make labor more efficient, how do we reduce the rework, how do we get better reimbursements, how do we get better contract terms, how do we help them hire the right people for his office or her office, how do we get the right supply chain put in place, and by the way, how do you adapt best practice so you can have better clinical results and compete with anyone in the industry in terms of a results outcome-based discussion. Well, if you walk in there as a distributor, you don't earn the privilege to have that discussion. If you walk in there as a business partner and have credible tools and a knowledge about the industry, you actually afforded the right to have that discussion. And so we are bringing things into Canada like RelayHealth, as an example, where we can have a talk with the government about having visibility to help pharmaceuticals that are consumed in that marketplace and whether there is adherence and compliance and how many people are showing up in the emergency room because they didn't take their meds. And now they suffer, their family suffer and the health care system suffers and the economy suffers by a product of folks not taking a $4 generic. You can't cut the $4 generic by enough to make up for the savings that's lost when we don't focus on better care and individual responsibility for people's care. So I think that if you think about the transition we have to go through as an economy and boil it down to health care is the problem and then say the drivers of health care are a lot to do with education and compliance and knowledge and combined incentives, we're not going to solve the problem. So if you think at the highest level, that's what we're trying to position the company to do. And so -- and sometimes people say to me, "Why do you have these technology assets? They're only x percent of your total earnings?" Well, technology assets, if they're properly managed and put together the way Pat has been putting them together, really gets us into a discussion that's much more robust with our customers. And all of these businesses are talking about technology and how important it is to our customers, and therefore, it's important to our position with those customers going forward. So that's been the strategy.

Paul C. Julian

Yes. I would just add to that. Scale in Canada has been very important to us and the operating efficiency, the operating excellence. And Nick talked about what we do for the Banner as it relates to virtual chain, whether back office or private level generics. We have Pharmacy System capabilities up there from an operating platform standpoint. So all of these business start with scale and operating efficiency. And the customer discussions, therefore, are much more vibrant in terms of solution sets and what else we can do to help them thrive in their respective marketplaces. So Canada is just one example of that.

Ross Muken - ISI Group Inc., Research Division

It's Ross Muken from ISI. So we talked a bit about consolidation across your industry or some of the adjacencies, but you're also seeing it in terms of some of the manufacturers that you deal with. Particularly on the generics side, we're seeing kind of another round of sort of M&A there. How does that make you think about sort of the progression? Or what does that do to your business over time positively or negatively? And how does it influence it all also, how you sort of think about your Northstar strategy?

Nick Loporcaro

Well, I think there is certainly some consolidation going on with some of the larger players. What's interesting is there's also new entrants coming into the generics market all the time as well. So I think how it will continue to evolve remains to be seen, but clearly, we do see continued consolidation with some of the larger players and some of the larger players increasing their scale. I think as it relates to Northstar, it's interesting because the conversations that we're having with manufacturers about Northstar today are very different perhaps than they were a number of years ago. And there's a more -- very set of manufacturers that are interested in potentially participating with us in our Northstar private label. So we view that very positively. And certainly, if the market continues to consolidate in generics, the outcome of that hopefully would be a more efficient generics supply chain, which we think would have benefit to us as well. So it's obviously pretty fluid and dynamic. I don't think we have a crystal ball necessarily to see what the generic manufacturer landscape will be in 5 years, but it's obviously something that we stay very close to and think about how we can take best advantage we can as that evolves.

Ross Muken - ISI Group Inc., Research Division

And maybe one for Marc. We were talking before about some of the challenges in the oncology market, particularly amongst community oncologists. You have kind of the broadest portfolio in that spectrum. How does that also afford you maybe some share gain opportunities in terms of bringing a different set to kind of that base? And how does your offering kind of maybe compliment with some of the challenges, some of the folks are going through now in terms of profitability, et cetera?

Marc E. Owen

Well, I think if you're a smaller practice, you look at the constraints on you, you look at the regulatory constraints, you look at the reimbursement, you look at the other things, and you say, "Maybe we should be part of something larger. Maybe we should be part of a bigger entity that can help us, whether they choose to join The US Oncology Network or just move closer to McKesson as in our open market." We do bring those things to those practices. So I think you will see continued -- some continued consolidation. And I think practices will continue to look for a place where -- and a partner that can help them on all of their concerns and not merely on one part of their business, because they don't have the luxury to deal with 20 different players to help them in 20 different ways. They really are looking for somebody who can say, "Across all dimensions, whatever question they ask us, we will have a point of view on and we will be able to help them on."

John H. Hammergren

Another question here.

Steven Valiquette - UBS Investment Bank, Research Division

This is Steve Valiquette from UBS. As far as I got this far without any questions and additional color on the quarter, but I guess just given those comments, should we think about EBIT margin expansion maybe in that June quarter in the Distribution Solutions segment versus the year ago? Or just any color on the unusually strong results that we should be seeing.

Erin Lampert

So in my remarks, I talked about economics on both the brand and generics side that were driving some of my commentary for the first quarter. And I'd just remind you that on the branded side, as you know, most of our agreements with branded manufacturers are on a fixed fee basis. And so probably, as you've seen in the past, the timing of some of those economics can shift from quarter-to-quarter and certainly one of the reasons why we don't provide quarterly guidance on a regular basis. And so that's a factor that we're seeing. And on the generics side, I think, as many people know, when we talk about our generics business, you're talking about thousands and thousands of molecules. But over the course of the year, I think our history suggests that we do a pretty good job at forecasting. But again, timing can shift on us. So I'd just emphasize again that it's pretty early in our fiscal year and I think way too early to call a trend change, but I'm more just highlighting a couple of data points that we've seen thus far this early point in our year in that directional commentary.

Ann K. Hynes - Mizuho Securities USA Inc., Research Division

Ann Hynes from Mizuho. I'm just interested in the specialty slide. Your CAGR for growth is 4%, which seems pretty low to me because we've always been told this is a mid-teens type of business. What's driving that growth?

Marc E. Owen

Well, I think if you look at the specialty growth overall, specialty drugs, meaning biotech drugs, will continue to grow. And I think if you look at overall industry growth, which will be partly in the Specialty Health business and partly in the U.S. Pharmaceutical distribution business, we expect to continue to see healthy specialty growth. If we look at it from a clinic physician office standpoint of the place that we are focused in McKesson Specialty Health, then we look at all the puts and takes and we come to the 4%. But if you look at the industry overall, I think part of that growth is being driven by the launch potentially of new blockbuster drugs in hepatitis C and other things that wouldn't go through McKesson Specialty Health but would go through our U.S. Pharma business. So McKesson overall is properly exposed to the overall market. And I was just talking about the one piece, that is the clinic and physician office market, particularly, oncology that we see.

John H. Hammergren

So you gave them a market number that was put in the context of the market we serve.

Marc E. Owen

It's market that we serve. It was in the context of McKesson Specialty Health. If you look at specialty overall in [indiscernible] new drugs, you come up with [indiscernible]. But most of those other products will continue to go through McKesson.

John H. Hammergren

All right.

Unknown Attendee

A quick follow-up on specialty because, Marc, you bring up a good point, and I don't know if either Marc or Paul would want to break this out. As McKesson thinks about its specialty business, should investors think about the specialty segment as part of the business where the specialty drugs are sold with McKesson's high-touch services wrapped around it? Or does McKesson qualify specialty by the type of drug it is? And I know that other wholesalers, when they report their specialty segment, it shoots the segment where there's the high RAC [ph] services. And to your point exactly, Marc, there are a lot of specialty drugs that flow through the regular way wholesaling company that aren't necessarily captured in specialty results. So is there any further color you can provide on how much specialty drugs actually flows through McKesson? And how should we think about the low -- what we would consider the low-margin specialty business versus the higher-touch, higher-margin, higher value-add specialty business?

Paul C. Julian

Well, we don't typically break that out, so it would be difficult for me to comment on that. What I can say is that in the core U.S. Pharmaceutical wholesaling business, specialty is growing faster than the 4% you see in the clinic -- oncology clinic market. And as Nick alluded to in his comments, specialty in Canada is really our fastest-growing segment in Canada. So it's a mixed bag of being average at some point.

John H. Hammergren

They actually are almost -- there are several models we have for specialty, the hospital distribution model where a lot of specialty goes, specialty that is done inside of Marc Owen's business that is distribution-only-oriented and then to your point, the high-touch, network-driven specialty distribution. So there are a lot of different business models. But I would also think it's correct to say that specialty that flows through the hospital is reported in our U.S. Pharmaceutical numbers as opposed to [indiscernible].

Unknown Attendee

People probably don't fully appreciate how much specialty [indiscernible].

John H. Hammergren

Right. And I think from a share perspective, our hospital specialty share is probably similar to our hospital share overall. They buy the rest of their pharmaceuticals from [indiscernible]. The specialty drugs flow along with it, typically how it works.

Well, I want to thank you, all, for your time and attention this morning. It's been a great Q&A session. It's been good for us. Hopefully, you benefited from this dialogue. And we look forward to continuing to update you on our progress at our upcoming quarterly calls. Erin, when is the next one scheduled for earnings?

Erin Lampert

We'll announce it soon. It'll be at the end of July.

John H. Hammergren

Okay. End of July. That's a hint. It's going to be the end of July. Obviously, I'm ahead of my skis here. Have a great day. Thank you. And travel safe. And appreciate your support of McKesson.

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