Craig Mercer – Senior Vice President-Investor Relations John Hammergren – Chairman and Chief Executive Officer Britt Vitalone – Executive Vice President and Chief Financial Officer

Glen Santangelo – Deutsche Bank Lisa Gill – JPMorgan Ricky Goldwasser – Morgan Stanley Brian Tanquilut – Jefferies Eric Coldwell – Baird Ross Muken – Evercore Robert Jones – Goldman Sachs Kevin Caliendo – Needham Eric Percher – Nephron Research George Hill – RBC Charles Rhyee – Cowen and Company

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

Thank you, Ciciliya. Good morning and welcome to the McKesson’s fiscal 2018 third quarter earnings call. I'm joined today by John Hammergren, McKesson's Chairman and CEO; and Britt Vitalone, McKesson’s Executive Vice President and Chief Financial Officer. John will first provide a business update and then Britt will review the financial results for the quarter. After Britt’s comments we will open the call for your questions. We plan to end to call promptly after one hour at 9:00 AM Eastern Time. Before we begin, I'll remind listeners that during the course of this call we will make forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of McKesson. In addition to the Company's periodic, current and annual reports filed with the Securities and Exchange Commission, please refer to the text of our press release for a discussion of the risks associated with such forward-looking statements. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures. In particular, John and Britt will reference adjusted earnings, adjusted operating profit margin excluding non-controlling interests, and items excluding foreign currency exchange effects. We believe these non-GAAP measures provide useful information for investors with regard to the Company's operating performance, and comparability of financial results period-over-period. Please refer to our press release announcing third quarter fiscal 2018 results for further information, and a reconciliation of the non-GAAP performance measures to the GAAP financial results. Thank you, and here's John Hammergren.

Thanks, Craig, and thanks everyone for joining us on our call. Today, we reported solid operational performance and we have raised and narrowed fiscal 2018 guidance range of $11.80 to $12.50, to a new range of $12.50 to $12.80, driven by a lower tax rate and lower share count. First the third quarter we generated total company revenues of more than $53 billion and adjusted earnings per diluted share of $3.41. Before I delve into the details of the quarter let me briefly touch on a couple of recent developments. We are excited to have just closed the acquisition of RxCrossroads. We are committed to broadening and deepening our portfolio of solutions and services to better serve our pharmaceutical and biotechnology or biopharma manufacturer partners’ needs. Our vision is to be the partner of choice across the product life cycle by creating a comprehensive, best-in-class, differentiated set of services. RxCrossroads expands and improves our existing services and third-party logistics, reimbursement access and health and pharmacy solutions. It also compliments our offerings to include upstream plasma logistics and specialized field support. The integration of this business with our existing biopharma facing solutions will enhance our ability to provide turnkey solutions for our manufacturer partners. To assure patients get access to innovative therapies to enable rapid market penetration of products and help manufactures create value. And for payers, we can provide evidence in a value-based way to highlight the best solutions for the patients they server. In summary, we have a unique set of capabilities that bring a superior value proposition to our bio pharma partners. In the third quarter we made the decision to bring the capabilities of our Specialty Health and businesses under Nick Loporcaro’s strong leadership, which will allow us to more closely coordinate and optimize how we provide service and solutions to our manufacturer and provider partners across the health care landscape. Many of you have met Nick at prior Investor Day events. He brings extensive experience to leadership positions he has held at McKesson Canada and McKesson Specialty Health. As some of you may recall when we were beginning to build our specialty franchise more than a decade ago, we made the decision to carve out these assets from our U.S. Pharmaceutical business in order to incubate high growth opportunity to maturity. Now that our specialty franchise is well established and a leader in the market, a decision to combine Specialty Health and U.S. Pharmaceutical under Nick’s leadership is a natural next step in the evolution of these businesses. And for retail pharmacy customers with our recent acquisition of acquisition of Well.ca, we have strengthened our ecommerce capabilities hopping to provide an omni-channel presence in serving our customers in a way that works for them. In addition to leveraging digital capabilities, our suite of retail pharmacy services extends beyond simply filling the prescription. For instance, we connect the patient digitally with the pharmacists for medication education, treatment protocols and medicine scheduling reminders, which drive adherence across our global retail footprint. Turning now to our business results, our North American pharmaceutical distribution and services businesses, which include U.S. Pharmaceutical, McKesson Specialty Health, McKesson Canada and McKesson Prescription Technology Solutions, had year-over-year revenue growth in the third quarter of 7% on a constant currency basis. I'd like to discuss a few highlights in U.S. Pharmaceutical and Specialty Health. The business is now headed by Nick. I'm extremely pleased with the progress of ClarusONE and its strong contribution to our results this year. We have contracted a diverse range of manufacturers delivering benefits to our partner Walmart and more broadly, with all of our customers who purchase generics through us, helping them to be more successful in a competitive and dynamic market. Next we continue to implement differential pricing for brand, generic, specialty, biosimilar and OTC drug classes, as they work through our contract renewal cycles. We are pleased with the results and remain focused on receiving fair compensation for the services we provide for each drug category. Finally, we are working closely with Rite to ensure the successful transition of the allotted stores to Wallgreen. We continue to deliver exceptional value to Rite every day and we remain comfortable that our sourcing scale and capability has not been – will be impacted by this transition. In addition to my earlier comments on the RxCrossroads’ acquisition, and the breadth of our capabilities we are building and the support of biopharma companies, the intraFUSION acquisition enhances our muti-specialty footprint with the focus on neurology and rheumatology. I’m happy to report that the team is executing the integration plan and we are doing well relative to the business case. Additionally, the BDI Pharma business we acquired last quarter is a solid compliment to our existing plasma offering that allows us to expand plasma and biologics distributions into specialty pharmacy and homecare with differentiated expertise. We’re also pleased with the progress on integrating this transaction. I’ll move next to our Canadian business, where we saw nice growth in the quarter with constant currency results that were in line with our expectations as we passed the one year mark, following our acquisition of Rexall. We’re also encouraged by the progress we’re making on integrating and executing against the business cases of our Uniprix and GMD Distribution acquisitions. Before I move on, I wanted to comment on the recently announced generic price initiative by the Canadian Provincial Government. The initiative, which is effect of April 1, 2018, will reduce the pricing of approximately 70 commonly used generic drugs. We have a broad range of businesses in Canada which are growing strongly. While certain of our businesses will be affected by this initiative, we are evaluating the economic impact of these reductions. We are engaged in the dialogue with the governments around ensuring fair compensation for the wholesale and retail services we provide to drive better health. And within our prescription, McKesson Prescription Technology Solutions business, which has demonstrated excellent revenue growth, CoverMyMeds is honored with Frost & Sullivan's 2017 North American Visionary Innovation Leadership Award, recognizing our prior authorization solutions. While this award highlights the innovation and solutions we bring to the market, more important it demonstrates how we deliver value to pharmacists, manufactures, providers and payors. Turning now to our results for International Pharmaceutical Distribution and Services, we made progress on addressing the challenges facing our UK retail business that we announced in conjunction with our second quarter results. We are actively in the process of either closing or selling approximately 200 retail pharmacy locations. Although we have concerns with the current UK reimbursement environment, we remain committed to supporting our pharmacy customers. We do this by making it easier for patients to get what they need, whether they are through services like Click and Collect, Lloyds Online Doctor or the ability to consult with a pharmacist when you visit a store. Additionally, we collect data and provide analytics which helps retail pharmacies manage individual patients, drive adherence and deliver better health outcomes. When we put these assets together, it demonstrates how our investments provide pharmacies with a comprehensive offering to reduce time and administrative activities, while improving the focus on patient care. And finally, our medical surgical business continues to be one of the fastest growing businesses in our portfolio, reflecting strong market growth, including the benefits from a shift to lower class sites of care. We continue to expand our services to medical surgical manufactures. I’ll highlight our success in the last business where we serve as a sales team for certain manufactures that focus on the physician and community hospital labs. This is a great example of the unique value we will bring to the manufacturers for expanding the range of services our customers can provide to diagnose and treat patients for a variety of clinical conditions. In summary, I’m pleased with how our Distribution Solutions segment preformed in the third quarter. Turning briefly to our Technology Solutions segment, beginning with this quarter, this segment consist solely of our 70% equity investment in Change Healthcare following the successful sale of our Enterprise Information Solutions business in early October. We continue to see progress against the execution of the business case and a realization of the anticipated cost synergies. Next let me take a moment to provide our perspective on the recently enacted federal tax reform. We’re a supporter of the tax reform and believe that it will allow U.S. companies to make new investments and to improve their competitive position. Our complex, and scope and nature we recognized a net benefit from the tax changes. Any cash realized from the reform will be deployed using our portfolio approach with the goal of delivering value for our shareholders through mix of internal capital investments, acquisitions, share repurchases and dividends. In addition, we expect Change Healthcare to benefit from the recently enacted tax reform, given it is predominantly a U.S. focused business. Britt will provide you with more detail on the impact of tax reform. And to summarize, McKesson's fiscal third quarter results represented continued execution across the enterprise, and we are raising and narrowing our adjusted earnings guidance for fiscal 2018 from $11.80 to $12.50 to a new range of $12.50 to $12.80 per diluted share. Before I turn the call over to Britt Vitalone, our new CFO, I want to take a moment to thank James Beer for his contributions. I appreciate the support over the past four years. Some of you have already met Britt and know his background. But for those of you who don't, I'm happy to share some details with you. During his 12-year tenure with McKesson, Britt has led the corporate FDA and M&A finance functions, was CFO of our Medical-Surgical business and most recently served as CFO of our U.S. Pharmaceutical and Specialty Health businesses. He also has deep operational experience, which included the creation of the ClarusONE joint sourcing venture, which is delivering material generic sourcing benefits. While I'm pleased to have worked alongside James Beer over the last four years, our ability to immediately name a successor reflects our deep bench of talent. I look forward to continuing to work with Britt in his new role. With that, I'll turn the call over to Britt and return to address your questions when he finishes. Britt?

Good morning. And thank you for your kind remarks, John. As this marks the first time I'm addressing our investment community on an earnings call, I want to take a moment to make a few opening remarks. I'd also like to start by thanking James Beer for his leadership over the past four years. He's had a tremendous impact on the company, and I've enjoyed working closely with him. I wish James all the best. I've been in the role a few weeks now, and I'm excited about the opportunities have in front of us, and the opportunity to serve as McKesson CFO. I look forward to working with our investors and the analyst community. Finally, I'm going to briefly mention our current segment reporting. With Paul Julian's retirement as of the beginning of the calendar year, we are currently evaluating our operating structure. I anticipate that this review will result in a change to our existing segment reporting structure beginning in the first quarter of fiscal 2019. We'll provide an update and additional details on our fourth quarter earnings call in May. Turning now to the results of our fiscal third quarter. Today, we reported third quarter adjusted EPS of $3.41, reflecting solid operating results, a lower tax rate driven in part by discrete tax benefits and a lower share count. And as a result of a lower tax rate and lower share count, we are raising and narrowing our fiscal 2018 adjusted earnings outlook to $12.50 to 12.80 per diluted share. Let me start with a review of the Tax Cuts and Jobs Act of 2017. We believe the new tax law is positive for business and for McKesson. As noted in our press release this morning, our third quarter GAAP results reflect material benefit stemming from the tax act. Both McKesson and Change Healthcare recorded net benefits related to the tax act in the third quarter. These nonrecurring benefits are excluded from our adjusted earnings. In December, McKesson recorded a net tax benefit of approximately $370 million, which contributed $1.78 to our third quarter GAAP EPS. This net tax benefit results primarily to the re-measurement of deferred tax liabilities, principally related to LIFO due to a reduction in the U.S. federal tax rate from 35% to 21%, partially offset by the impact of transition taxes and foreign retained earnings. In addition, Change Health recorded a net benefit, driven primarily by the re-measurement of its deferred tax liabilities at a lower tax rate. McKesson's 70% equity interest of that benefit is expected to be approximately $70 million to $110 million, which will be reflected in the equity investment in Change Healthcare line. However, given the 1-month lag in McKesson's reporting of our equity share of Change Healthcare, that benefit will be reflected in our fourth quarter GAAP results. Next, let me discuss the impact of federal tax reform on our adjusted earnings. For McKesson, beginning in the fourth quarter of fiscal 2018, we expect a lower rate driven by the new U.S. federal tax rate. We expect a tax run rate range of 22% to 24% driven by our mix of business. That said, each fiscal year's tax rate may be impacted by its pre-tax charges or benefits during the year from items, such as tax planning initiatives and examinations of our tax returns by the tax authorities. We anticipate our fiscal 2018 adjusted tax rate will be approximately 21%. I would remind you that are anticipated fiscal 2018 adjusted tax rate has been positively impacted by the intercompany sale of software related to our Technology Solutions segment in the third quarter of fiscal 2017. That P&L benefit is expected to end at the close of fiscal 2018 driven by a change income tax accounting rules. To summarize, we expect our fiscal 2019 adjusted tax rate to be above our fiscal 2018 adjusted tax rate, driven the by lapping of discrete tax items and the full year benefit related to software amortization realized in fiscal 2018. We'll provide an update on adjusted tax rates for fiscal 2019 and will provide guidance in May. For Change Healthcare, as I previously mentioned, we report these results in a one-month lag. And as a result, their fourth quarter will include the effects of the lower run rate for two months of Change Healthcare results. Specific to fiscal 2019, we'll provide additional insight on McKesson's expected adjusted equity income from Change Healthcare when we provide guidance in May. Finally, as a result of the tax act, we anticipate modestly favorable cash flows over time. We expect to deploy these favorable cash flows in line with our portfolio approach to capital deployment. While some of the items I've just discussed have an immediate impact, there are certain items within tax reform in which companies have up to a year to finalize. As such, we may have true-up's in future quarters. In our 10-Q we filed later today, you'll find additional information about the impact of federal tax reform and the provisional amounts recorded in the quarter. Now let me turn to financial results for fiscal third quarter. The results that I provide this morning will be on an adjusted basis, unless I specifically call them out as GAAP. We provided a GAAP to non-GAAP reconciliation and our 8-K filed this morning. As a reminder, our adjusted earnings exclude the following items: amortization of acquisition-related intangibles, acquisition-related expenses and adjustments, LIFO inventory related adjustments, gains from antitrust legal settlements, restructuring charges and other adjustments. Starting now with a review of our consolidated results, which can be found on Schedules 2 and 3. For the third quarter, consolidated revenues increased 7% year-over-year. Adjusted gross profit dollars increased 2% from a year ago, adjusted operating expenses increased 3% year-over-year and adjusted other income was $22 million for the quarter. Adjusted equity income from Change Healthcare was $55 million for the third quarter, which was adversely impacted by a lower-than-expected contribution in Change Healthcare's imaging business due to deferrals of customer purchases. We now expect adjusted equity income from the Change Healthcare joint venture to be in a range of $265 million to $295 million in fiscal 2018. Interest expense of $67 million, decreased 9% for the quarter, driven primarily by the refinancing of debt at lower interest rates. Our adjusted tax rate for the third quarter was 11.5%, driven by discrete tax benefits of approximately $54 million in the quarter, which primarily relates to the conclusion of certain tax audits. We now anticipate our fiscal 2018 adjusted tax rate will be approximately 21%, down from approximately 24%, driven in roughly equal parts by our expected mix of business, lower adjusted tax rate in the fourth quarter and the discrete tax benefits recognized in the third quarter. Income attributable to noncontrolling interests, or NCI, was $58 million for the quarter. As a reminder, the year-over-year increase in NCI is primarily driven by fee income from ClarusONE, our joint sourcing entity with Walmart Adjusted net income from continuing operations totaled $712 million, with third quarter adjusted EPS at $3.41, which is up 12% compared to $3.04 in the prior year. Third quarter year-over-year adjusted EPS growth was primarily driven by a lower share count, organic growth across multiple business units, including the company's strategic sourcing benefits through ClarusONE, incremental profit contribution from acquisition and a lower tax rate, which included discrete tax benefits, which are unrelated to tax reform. These positive drivers were partially offset by lower profit driven by the contribution of the majority of the Technology Solutions businesses of Change Healthcare, the sale of our EIS business and the impact of reduced reimbursement in our UK retail pharmacy business. Wrapping up our consolidated results, diluted weighted average shares outstanding were $208 million down 6% compared the prior year. Next, I'll review our segment results, which can be found on Schedule 3. Distribution Solutions segment revenues were $53.6. Revenues benefited from $663 million in favorable currency rate movements. On a constant currency basis revenues increased 7%, year-over-year. North America pharmaceutical distribution and services revenues increased 8%, driven by market growth and acquisitions partially offset by brand to generic conversion. International pharmaceutical distribution resources revenues were $7 billion this quarter. Revenues benefited from $530 million in favorable currency rate movements. On a constant currency basis, revenues were up 4% driven by acquisitions and market growth. Our UK team continues to make progress in the retail pharmacy initiatives we outlined on our second quarter earnings call. To date, we've identified approximately 200 store closures and divestitures, which approximately 90 stores are expected to be divested. We continue to expect meaningful savings from this program in fiscal 2019. And finally, Medical-Surgical revenues increased 9%, for the third quarter driven by market growth. Distribution Solutions adjusted profit was up 20% for the quarter, driven by acquisitions and organic growth across multiple business units, including the company's strategic sourcing benefits through ClarusONE, partially offset by the impact of reduce reimbursement in our U. K. retail pharmacy business. Brand compensation for the third quarter was in line with expectation. Additionally, January brand manufacturer pricing activity was in line with our expectation, and we continue to see results slightly above our full year assumption of mid single digit brand manufacturer price inflation. I would point out that while the overall brand inflation rate is important, it is less important in prior years as we continue to evolve our brand compensation arrangements, reduce the variability from branded inflation. As it relates to the generic market environment, generic deflation on the buy side continues to be in line with our expectation. The sell-side pricing environment remains competitive yet less volatile than the year-ago period. Distribution Solutions segment adjusted operating expenses increased 18% for the quarter. Segment operating expenses required an increase driven by acquisitions and the mix of retail business, partially offset by an ongoing cost management output. As a reminder, in fiscal 2018, our year-over-year growth for adjusted gross profit and adjusted operating expenses are impacted by the shift of business in the segment, including our larger owned retail footprint and technology businesses. Distribution Solutions segment adjusted operating profit increased 23% to $991 million, driven by the same factors as previously discussed. In constant currency, segment adjusted operating profit $982 million. As a remainder, in the third quarter of fiscal 2017, the McKesson's adjusted operating profit was negatively impacted by two nonrecurring charges showing approximately $60 million. The third quarter segment adjusted operating margin rate was 185 basis points an increase of 22 basis points. The adjusted margin rate was also impacted by our customer and product mix, including the growth of higher-priced specialty pharmaceuticals. Due to the mix shift, we now expect our full year Distribution Solutions adjusted operating margin rate to be slightly below our original guidance range of between 198 basis points and 208 basis points. McKesson recorded $109 million in adjusted corporate expenses for the third quarter. We now expect adjusted corporate expenses to be between approximately $410 million and $430 million in fiscal 2018. I’ll review our balance sheet metrics. Our receivables day’s sales outstanding decreased one day from the prior year to 27 days. Days sales in inventory decreased one day from the prior years to 30 days. Days sales in payables decreased one day from the prior year to 58 days. It's important to point out that our working capital metrics may be impacted by timing, including the day of the week that marks the close of a given quarter. We ended the quarter with a cash balance of $2.6 billion and to the first nine months of fiscal 2018 we generated $1.3 billion in cash flow from operations. We continue to efficiently deploy capital. For the first nine months of fiscal 2018, we repaid $545 million in long term debt and we spend $392 million on internal capital investments. We now expect property acquisitions and capitalized software expenditures in fiscal 2018 to be below the previously guided range between $650 million and $750 million. And we spend $2 billion on seven acquisitions during the first nine months of fiscal 2018. In the third quarter, we repurchased $250 million in common stock. Share repurchases during the first nine months of fiscal 2018 totaled $900 million. We now expect our weighted average diluted shares to be approximately $210 million for the full year. We have approximately $1.8 billion remaining on our share repurchase authorization and yesterday, the Board of Directors approved the next quarterly dividend of $0.34 per share. Now, let me provide more detail on our fiscal 2018 adjusted EPS outlook. As mentioned earlier, we have raised and narrowed our fiscal 2018 adjusted earnings from a range of $11.80 to $12.50 per diluted share to a new range from $12.50 to $12.80 per diluted share. As a remainder, our fiscal 2018 adjusted earnings outlook exclude the following items. Amortization, acquisition related to tangible of $2.35 to $2.65 per diluted share, acquisition related expenses and adjustments of $1 to $1.20 per diluted share, LIFO inventory-related charges of $0.05 – credits of $0.05 per diluted share, gains from antitrust legal settlements of up to $0.05 per diluted share, restructuring charges of $1.25 to $1.45 per diluted share and other net credits of $0.50 to $0.70 per diluted share. Unless stated otherwise today, the underlying assumptions that were detailed in our fourth quarter fiscal 2017 press release and on our first and second quarter fiscal 2018 earnings calls are being reiterated. We continue to expect foreign currency exchange rate movements will have a net favorable impact of approximately $0.10 for the year. In closing, our third quarter results were operationally in line with our expectations, and we're pleased to be able to raise our fiscal 2018 outlook to reflect the lower tax rate and share count. We are well positioned for a strong finish to fiscal 2018. With that, I'll turn the call over to the operator for your questions. In the interest of I’d ask to limit yourself to just one question and a brief follow-up to allow others an opportunity to participate. I’ll turn the call over to the operator.

Thank you. [Operator Instructions] We will now take our first question from Glen Santangelo from Deutsche Bank. Pease.

Hi, thanks and good morning. Hey Britt I just want to sort of follow-up on the comments you just made about the operating profit assumptions within the Distribution Solutions segment. I think you sort of suggest that you now expect to come in slightly below the range, and I'm just kind of – could you give us a little bit more color? Because it kind of sounds like price inflation is sort of in line with what you thought, maybe a little better. Generic deflation is kind of what you thought. We're not seeing any sort of strange activity in terms of the competitive landscape. So could you maybe just landscape. So could you maybe just give us a little bit more color? And then I have a follow-up. Thanks.

Yes, sure. Thanks for that question. Yes, we did note here that we're going to be at the low end or slightly below the range. And I would attribute the to mix. As we talked about from quarter-to-quarter, we have a variety of mix between both products and customers, and I think that's really driving that comment. As we noted, it was an in-line quarter, but I would just point out to the mix of both product and customers.

Maybe I could just ask one follow-up. John, you talked about differential pricing, and you're sort of going through repricing all your contracts sort of one by one. Any sort of takeaways from those repricings? Any impact on the margin that sort of worth calling out as we look on a go-forward basis?

Well thanks for the question Glen. Clearly, we've talked about the importance of our work in this area. And I think our customers clearly understand that the mix changes going on in our industry is more and more as these specialty products are coming to the marketplace. And so I think in the short term, it has little impact on us or our customers, but as we reposition in advance of what we see is a cycle of a lot of specialty product, into the marketplace, we think these adjustments are appropriate for us. And frankly provide better line of sight to our customers related to all these products flow through the supply chain. So we're making good progress, and we would expect to be complete with this, as you noted, these final contracts renew in the last section of this work.

Okay. Thank you.

We will now take our next question from Lisa Gill from JPMorgan.

Thanks very much and good morning. Let me start on the drug pricing side. Clearly, there are still a lot of debate in Washington around drug pricing, Trump coming out the other night and talking about it. John, can you talk about how you expected to impact your business going forward. You talk about stabilization here. You know talking about mid-single digits, what are the things that you potentially could see? I know you spent some time in DC, so let me start there and then I just had a follow-up as well.

Well, I think you can break the drug pricing discussion into probably three large categories. Clearly, we continue to believe generic pricing and the related deflation we've experienced recently in that marketplace makes a generic product price very competitive. And certainly, as a percent of the total spend in health care, the price for these kinds of drugs or the treatment cost for patients continues to drop. And we think that, that phenomenon some of the pressure off the drug spend debate in this country and clearly, providing people with continued drug benefits also helps diffuse this. And for many folks that are on these drugs, the cost is somewhat immaterial to them on an annual basis. On the branded drugs, you've seen a significant drop in inflation, if you think about the trend in that indicator over the last several years. And likewise, we think that the level of brand inflation that we have now is acceptable and defendable by these companies as they continue to use the remaining product they have under patent to fund their increased R&D work. And the last category I'd point out is – are some of these new specialty drugs. And clearly, these drugs can be expensive, but, once again, when pressed, I think there's easy arguments to be made for how the use of these drugs and an analysis would show a decrease in the cost of health care for the patients that are on these treatments. And so in a value-based way, if people are thinking about health care spend and how to control it, I still think the use pharmaceuticals is the first and best place to go and get people on their treatments, get them to stay on them and adhere to the treatment and stay out of the hospitals.

So even though – the rhetoric is still there, and from your perspective, it doesn't sound like things have really changed from what they were one year ago. Is that the right way to think about it?

Well, you obviously have continued to see deflation in the generic side, and like I said, we've seen a significant reduction in the amount inflation on the brand side. And I think the area that continues to get some scrutiny are some of these specialty drugs that have a small population that are very expensive to bring to the marketplace and a more value-oriented request as pharmaceutical companies price these to compare what the other treatment might have cost our society or a payer. And so I think that there will be continued value-based discussions, but, frankly, I think the evidence will show that the spend on pharmaceuticals is an investment that's well made and one that pays a return compared to other alternatives. So I think, obviously, people that are in some of these categories, particularly the specialty categories, as a patient may find the debate interesting. But I think that as it relates to overall drug spend as a value, it continues to be one of the best values in health care today.

Okay, great. And then, Britt, just going back to your comment about the mix and talking about specialty. But I'm just curious around flu and what the impact of flu will have in your projections for the fourth quarter. I generally think of that as being a little bit of a lower-margin product. Is that having any impact on the way you're thinking about the margins for the fourth quarter?

I'd say that we've had a pretty strong flu season, I would say, as part of the product mix that I've talked about, along with specialty products. So that would be a part of the range that we provided you.

Okay, great. Thank you.

We will now take our next question from Ricky Goldwasser from Morgan Stanley. Please.

Yes. Hi, good morning. Thanks for taking my call. Just a couple of questions here. John, you mentioned the changes in reimbursement in Canada. I'd just kind of like help to frame the potential impact. Can you just walk through kind of what would be the profit contribution of Canada overall? We have it at around 7% of EBITDA. And any additional color on how these reimbursement changes compare to what you've seen in the past? Because there have been periods in the past where we've seen these generic price initiatives, and you were able kind of like to manage through them.

Thanks, Ricky, for the question. As you point out, the Canadian business is significant to McKesson and important and has continued to grow nicely. And in the past, we have been impacted negatively from reimbursement changes that have sort of rolled through various provinces at different periods in time. It's probably early to size the impact of these most recent changes or what work we might be able to do to find reimbursement channels for the services we provide in retail or wholesale from the government or other offsets that we might find in the business as we continue to grow in the wide variety of businesses that we are in, in the Canada market. I would say the difference this time compared to the other types of reimbursement events is that this one is across all provinces, all at the same time, effective April 1, and not insignificant in its impact on that portion of our business, the generic business. So I think it's important for us to point it out. We'll talk about it more as we get into our guidance for next year and think about it as we work through the discussions we have with the Canadian government related to what services they want to reimburse us for, et cetera. So I think it's important, but it's something that we are used to, to the extent that we've had to deal with this in the past.

And then just as a follow-up, when we think about the tax benefit and kind of like how you're thinking of investing back into the business, you talked about acquisitions, buybacks and dividends. But when you think about kind of like the capital initiatives, is there any kind of like way that you can help us kind of like think through it and quantify it as we're kind of like thinking about the pull-through to fiscal year 2019?

Well, I think Britt has already outlined sort of his expectations from a tax rate perspective. We, I think, provided a range, and that should be helpful to you. As it relates to the use of the incremental cash produced by this very favorable tax law change, I think our comment was we will continue to follow a portfolio approach, and that's probably the most color I can provide you. You know that we do have a great track record of making intelligent acquisitions and not overpaying for them and doing a great job of integrating the acquisitions. And so that continues to be one of our top priorities, but you also notice that we've done relatively significant share repurchases this year. And we will probably continue to use both of those, along with our dividends, as a strategy to grow. I do think that we are beginning an innovation phase at McKesson that we're excited about, that is more than just the M&A side of things. And so although acquisitions have played a role in the past, I think that we will find a way to provide innovation and opportunity to grow organically inside of McKesson, and that's some of the investment that we plan to make.

Thank you.

We will now take our next question from Brian Tanquilut from Jefferies. Please go ahead.

Good morning, guys. Just wanted to ask a question on the ClarusONE comment. So how do we – how should we think about the remaining opportunity there in terms of either expanding the relationship with Walmart or expanding the client base and product lines? And what's your outlook on incremental margin opportunities with ClarusONE? Thanks.

Well, thanks for the question. It's great to have Britt here at the table, given that he was the one that built ClarusONE and got it implemented on time and produced results that were not only at our expectations but perhaps beyond, and it's the same thing for our partners that have benefited. Britt, maybe you can talk a little bit more about the opportunities we see.

Sure, John. We're very pleased with the progress that we've made at Clarus, and we're very pleased that our partner, Walmart, and our customers are benefiting from that. And we have quite a bit of opportunity as we go forward, whether that be geographic opportunities outside of the U.S. or as we look at other product opportunities. And certainly, we have those discussions with our partners all the time. So we believe that we've really got a great foundation in place. We've been able to partner with a number of manufacturers and really develop a beachhead around generics in the U.S., and we think we have tremendous foundation to take that further, whether that be, again, additional geographies or additional product categories. So we are quite excited about the potential that we have there, and we'll continue to explore that over the coming quarters.

All right, got it. Thanks, guys.

We will now take our next question from Eric Coldwell from Baird. Please go ahead.

Hey, thanks very much and good morning. Medical, I know it's not your biggest segment, but 9% growth is pretty impressive, especially on the heels of a peer's pre-announcement last night, realizing that there are channel differences. I'm just curious if you can give us a little more detail, parse out product categories that are growing quickly. Maybe talk about share capture or specific initiatives leading to this 9% growth rate. And then maybe give us a sense on how comfortable you are with that level of a growth rate going forward, if you are so. Thanks, John. Thanks very much.

Thanks for the question and thanks for recognizing what we think is really outstanding performance in our Medical-Surgical business. We have built a tremendous asset there that has been entirely focused on growing with our customers as they grow outside of the acute care health care system. And whether it's large health systems that are buying physician practices or whether it's long-term care centers or home care, we think we're extremely well positioned. And as I mentioned in my prepared remarks, we are expanding the product portfolio and the value that we deliver to our customers each day. And an example would be bringing lab and diagnostic into the physician office space. The – increasingly, technology is allowing us to do things right then and there in the physician office with the patient. The patient gets immediate results. The physician gets immediate results. Treatment decisions can be made immediately. And all can happen in a way that delivers better value for the patient, better care for the patient and, clearly, improved economics for the physicians. So there are several examples where we've extended our reach into these important markets, which expands our footprint. We've maintained and grown our business even through the acquisitions of doctors in the health systems market because of the value proposition that we deliver and our unique capabilities to service these disparate facilities in a low-cost, high-quality way, and we think the business is going to continue to grow. As mentioned earlier by Lisa, obviously, the flu market has been something that has also benefited us. Albeit not as profitable, it's an important part of the value proposition both in retail as well as in the ambulatory or physician office setting. So we benefited from some tailwinds relative to flu season. But I think our focus on the business and our great people there has also enhanced our performance. Next question please.

Next question comes from Ross Muken from Evercore. Please.

Good morning, guys. Maybe, John, could you just give us a little bit more color on some of the more recent acquisitions or some of the new segments you've formed have kind of trended? It feels like you sort of did a number of deals that kind of aided your core growth rate and maybe also margins. So a little bit of color on some of those would be helpful. And then maybe a comment on sort of the RxCrossroads deal and sort of what that brings capability-wise to the organization.

Well, thanks for the question, Ross. You've followed the company for a long time as well as some of your colleagues on this call. And if you watch what we do, it typically is arraying a set of assets in advance of opportunities fully materializing so that we can capitalize on the right strategic positions in advance of growth. We like things that are growing in an accretive way to the base. We like things that are providing margin opportunities that are accretive to our margin, and we like to be positioned in markets where the total available market is significant and where we believe it's going to grow rapidly and where we can win. So whether you think about our movement into the generic marketplace or our movement into alternate-site Medical-Surgical, we try to think about a go-forward where the growth will be. Similarly, you've seen us array a set of assets beginning with OTN against the oncology business years ago, probably over a decade ago, than the acquisition of U.S. Oncology and a string of other things that have positioned us for the specialty market, the most recent being RxCrossroads, as you just mentioned. So I think it is important for us to continue to grow our businesses and the value we can deliver to specialty manufacturers, not just in the supply chain but also in the ability for their product to be launched effectively, to be reimbursed effectively and quickly. And for the patient and the physicians and the pharmacies to be supported as these products are taken up by the patients is an important aspect of what we're trying to do. And clearly, working on the revenue side of specialty pharma provides a lot of incremental value to our manufacturer partners. And so anything we can do to get the script in the appropriate hands of a patient and properly filled and taken and adhered to is delivering tremendous value to the patient to begin with, but also delivering tremendous value to our partners in the supply chain. So we're excited about the value proposition that we're creating.

Thanks, John. And maybe a quick one for Britt, and welcome to the call. I guess, on just cash flow, a decent drain so far both year-to-date on working cap and deferred taxes. What is the updated view on sort of what the free cash number could kind of look at for the year? I am not sure I caught that.

Yeah, I would say there is no change to our expectations on cash flow at this time. It's, as I mentioned in my remarks, it's – where the end of the quarter finishes in terms of the day also has a big impact, and it's not unusual to see us have a strong fourth quarter for cash flow, and so for that – those reasons, I would say that we're not changing our expectations on generating free cash flow for fiscal 2018.

Great, thank you.

The next question comes from Robert Jones from Goldman Sachs. Please go ahead.

Thanks for taking my question. John, just want to go back to the public focus on drug pricing. One of the recent initiatives that we saw was led by hospitals with this idea of building out their own generic drug company to drive better accessibility and drive down price, obviously, with specific generic drugs. Just wanted to get your thoughts on that initiative specifically, how you think it could impact the industry? And then maybe just more generally, kind of what you're hearing and seeing from your hospital customers around drug pricing.

Well, I certainly read the announcement with some interest. We've been in the Generic business for a long time, and we've, obviously, built our NorthStar product line and great collaboration with the pharmaceutical manufacturers and delivered significant value back into the marketplace. I think that my interpretation of what's going on there is really related to availability, to a large extent; and to some extent, perhaps pricing. And probably those are two – those two things are tied together to some extent. I'm not sure that another manufacturer will necessarily dramatically improve the availability. If it's a raw material-related issue or just a capacity-related issue. It's difficult to bring capacity on and it's, obviously, difficult to get through all of the regulatory challenges associated with standing up a brand-new company. Having said that, there may be opportunities for these large and important customers, some of which are ours to work in a collaborative way with others in the supply chain to avail themselves of better product availability or supply and certainly to take their buying power and aggregate it in a way that gives them some price leverage in the marketplace. So we look forward to exploring opportunities, as you said, on these limited number of generic products that have been difficult to our customers and for the market and anything we can do to help them. I would say that I'm a little suspect of the ability to ground up a generic manufacturing company that's owned in a collaborative way and to compete with our largest generic manufacturing partners in a material way. I just don't see that as being a simple task.

Yeah, understood. I guess just one quick follow up, John, with one quarter left in the fiscal year, I know you guys will be getting formal guidance at a later time. But any initial thoughts as you look out to next year as we think about the major drivers? You talked about branded, generic pricing, volumes. Anything that you would foresee kind of stable, down or up as we look out into fiscal 2019?

Well, as we have said in the past, we go through periods in these markets that sometimes can be a little bit difficult to predict. But as we see it now at least, the markets remain competitive but relatively stable. We've, for a long time, dealt with a deflationary generic market with spots of inflation and the clearly those dynamics seem to have settled into a pattern flat that at least for the last few quarters, have been pretty similar in their compare. And I think the biggest change we see coming in front of us, as I mentioned earlier, is an innovation cycle, particularly in specialty drugs that will be important. And the support of those manufacturers that need to get access to the product and access to the market, I should say and speed to delivery to the patient will be important. And I talked a little bit earlier about things that we try to do to make that simpler. CoverMyMeds will be another great example where we try to reduce the friction associated with getting somebody approved to begin to take one of these drugs in an automated prior authorization format. So that's the longer-term change I continue to see coming, which is a mix change into these more difficult to take – or difficult to pay for, difficult to get access to and difficult disease states that these new drugs are going to be marketed to.

Great, thanks for the thoughts.

We will now take our next question from Kevin Caliendo from Needham. Please go ahead.

Thanks, guys, a couple of questions. First, you've done a lot of acquisitions on the manufacturing services, specialty side. Is there any capabilities or verticals there that you don't have yet that you feel you might need to sort of provide everything you can possibly provide to the manufacturers?

Well, clearly, there is all kinds of things that the manufacturers either do internally or are already sourcing from partners, and that list of activity is pretty long and significant and probably changing. We do think that the assets that we put together are important. It gives us important scale, it gives as existing customer relationships and it gives us a foundation in services that may not be entirely complete if you think packaging and outsourced manufacturing and some of those kinds of capabilities. But we think that parts of the manufacturer requirement, particularly, as I said, on the revenue and adherence side, are important. And we believe that our focus in that direction has been an appropriate one, and we can benefit our partners as well as ourselves by being world-class in our ability to make that happen. So I think we remain disciplined and vigilant as it relates to opportunities, but I don't think we feel like we are at a disadvantage in terms of what we have today and we will be opportunistic to evaluate other alternatives that may come along.

Okay. And one question just on foreign exchange and the benefit. Is that – you mentioned it's $0.10 – you still expect it to be sort of a $0.10 impact to earnings this year. But is it – what does it do to the actual margin of the business? I'm guessing it's a negative impact to the margin overall then. As you look at the reconciliation…

Yeah, as I would just point out that it’s – as we talked about, it's about a $0.10 impact. So it's a pretty modest impact on our operations at this point.

No, what I meant was you're taking an extra revenue. I'm just wondering has any material impact on your margin at all, the optics around it. I understand your…

Yeah, it’s not a material impact. It's not a material impact.

Great, okay, thank you.

We will take our next question from Eric Percher from Nephron Research. Please go ahead.

Thank you. Glad to hear that you’re considering financial segment and how that might change. But my question is actually maybe John your comments early on around the operational segmentation under Nick, how much of that is driven by simply these are now similar growth businesses versus change in what a manufacturer or dispenser needs from their wholesaler kind of the go-to-market strategy that you have. Is that changing as well and how does that fit into the operational change?

Right, I think that clearly many of the manufacturers that we do business with that would be selling product through our specialty channels or into the physician office or clinic setting are the same manufacturers that are in our full-line wholesale business going to hospitals or retail pharmacy. The service requirement is significantly different, and the structure of our relationships are usually significantly different. So I think that what we'll be able to do here is benefit from the relationships we have on the various sides of our business. Frankly, we'll go to leverage some of the structure we have, whether it's some of the functions that we have in these businesses that have been specifically focused on one business versus the other. And I think that the most important thing for us to do is to continue to think the needs of our customers whether it’s a pharmacy or the physician or the pharmaceutical manufacturer and make sure that we array the set of assets to them in the best possible way and frankly also keep our cost and our overhead down so that we can be quick and efficient. So it's probably a combination of many things. Obviously, underneath Nick are some very talented executives, and their line of sight focus on U.S. Oncology or some of the other ologies and businesses that we're focused on will remain. So I don't see a collapsing, so to speak, of the people that are selling things to hospitals into the same group that's servicing our U.S. Oncology network is an example.

And as you look at the segmentation, is there more room to run with the corporate efficiency program [indiscernible] in the innings of – I mean do you expect that to continue on into next year?

I’ll let Britt jump in here. Yes I would say, Eric, we have certainly, as John mentioned, as we think about a ring, our business is under a leader like Nick, as we look across all of our businesses. We've made great progress against our corporate expense in our segment expense initiatives. I think we still have tremendous opportunity, and we always focus on efficiency and looking to take cost opportunities so that we can better service our customers. So I think those are things that we'll always do, and I think we've made great progress in the last 18 months, but you should see us continue to focus on as we go forward.

And just relative to the next year, as we look at this year, has the management incentive plan been at – fully funded? Is there any catch-up that has to occur as we go from 2018 to 2019?

Why – we don't – I don't – to be frank, I haven't looked at the management incentive plan accruals recently, but I don't think there's a huge delta last year to this year or this year into a fully funded or less than kind of funded basis. So it's not something I think that will be something you have to focus on, Eric, as we think about FY'19, yes.

Okay, thank you.

We will now take our next question from George Hill from RBC. Please go ahead.

Yes, good morning guys. John, as we think about the differentiated pricing model, what should we think of is the key drivers of profit growth going forward? Is it underlying volume? Is it price? Is it business mix like it business mix like the growth in specialty business versus generic growth? I guess any color here would be helpful.

Thanks George for the question. Clearly, volume, price and mix are all important elements as we think about our business. And clearly, we're fortunate to be participating in an industry that is continuing to grow, both through innovation but also through demand, and the combination of those factors make us positive about our outlook. We are excited to be in health care and excited about our position in it and our focus on pharmaceuticals we think is an important one. I think that the biggest change that we've talked about today and even Britt was talking about it related to the third quarter is the evolving mix of our business. And these higher-priced, more specialty products that we believe deliver tremendous value and frankly, take cost out of the health care system, do have a negative mix or margin experience on us as we think about our overall P&L. And so what we've been attempting to do and been very successful at it as we find these five categories of pricing is to position our value proposition to the customers in such a way that they're – we're getting properly paid for the service we provide and that our business is evolving. Our business strategy and our business financials are appropriately evolving as our mix evolves. And that's probably the biggest change you'll see this continued mix shift towards specialty products.

Okay. And then I guess just a quick follow-up then. I guess just one last one on generics would be, as we think of the profit pool that's generated off of the sales of generic drugs, is that profit pool generally concentrated in a smaller number of products or even in half of the number of products? Or is it more broad-based? And I'm just thinking about this in comparison to when we saw profits concentrated in a smaller number of profits from the period of generic drug price inflation.

Well, I think that the – you all have access to the data that tells you which molecules are selling with greater volumes, and you also have pricing data not from us, but from an industry perspective, so you can kind of volume weight the mix of the industry and get some kind of overall view of where the dollars are spent. As it relates to the margin effect on the company like McKesson, that's difficult to discuss, given that there – that some of these molecules, even though they might be big and dollars, may have many, many competitors and, therefore, the profit opportunities may be reduced because of the competitive activities associated with those molecules. But I think we continue to see the generic market as attractive to us. Our position is very strong, and we're continuing to grow our portfolio of generics, not just in line with the market, but in some cases, we further penetrate our existing customers by taking on more and more of their generic sourcing and spend requirements. And so when Britt talks about the success of ClarusONE, part of the – of our value is taking our scale into the marketplace with all of our customers and giving them an affordable alternative to buying from some of these telemarketers and others that may have chipped away at our overall share position. And then, obviously, the launch cycle is less favorable today than – in terms of new products than it might have been a year ago. I think we have time for one last question.

We will now take our final question from Charles Rhyee from Cowen and Company. Please proceed with your question.

Yes, hi. Thanks for squeezing me in here. I guess most of my question has been asked. Maybe, Britt, on Change Healthcare, you made a comment contribution was down sequentially, and you said there was some issues in the imaging business. You called out a deferral in purchases. Does that mean we would expect those to come back in the next quarter, or maybe give us more thoughts on – inside on what's going on the part of the business and what we kind of expect even beyond just the updated contribution? Thanks.

Well, thanks for the question Charles. This is John I’m probably going to help Britt on this one given that he's pretty new to the team's health care activity, and we've just recently put him on the Board to replace James. We've had the imaging business inside McKesson for a long time. It's a great, great business with a very large franchise and a great market position and really a competitive product line. That business now is a, in whole, part of Change Health are and so our visibility to it has been reduced to some extent, given that we don't manage that business directly. It's managed by the Change Healthcare executive team. But I do – obviously, the McKesson people that are there, we talk frequently. And I would say that the biggest thing that we've seen is a change in the purchase cycle of our customers, and we would have expected them to continue to be buying new equipment and up – and refreshing their imaging work, and that usually provides us an opportunity to win the software that goes along with it than what we've seen is that – is significantly flatter market than we would have anticipated in the replacement cycle for some of this equipment, and, therefore, we see a flatness in our revenues in our imaging business. So, I think it's really driven more by market characteristics related to the use of capital by our largest customers and that capital being either not deployed at all or deployed in other areas. Having said that, we believe a lot of this imaging equipment is going to have to be replaced. It's just not contemporary any longer and when that replacement cycle comes back, the Change Healthcare imaging business, we believe, will begin to grow nicely again with its leadership position.

So, it's time for us to end this call. I want to thank you, Cecilia, for this work as an operator, and I want to thank all of you on the call today. I also want to thank our employees for their dedication to our customers and partners in line with our eyecare value of putting the customers first in all that we do. To underline this point, McKesson is once again ranked number one in our industry by Fortune Magazine in its 2018 World's Most Admired Companies survey. This annual survey measures corporate reputation and performance against several key attributes. While we are honored to be recognized for the second year in a row with this award, I'm deeply humbled by the work of our more than 75,000 employees whose unwavering focus on our customers will ensure our continued success as we move forward. In closing, I'm excited about the opportunities ahead of us. McKesson continues to execute against our fiscal 2018 plan, and we look forward to updating you with our fiscal 2019 outlook when we provide our fourth quarter's earnings results in May. Thank you, and goodbye.

Thank you for joining today’s conference call. You may now disconnect. Have a good day.