Investment in Change Healthcare Joint Venture

12 Months Ended

Mar. 31, 2020

Equity Method Investments and Joint Ventures [Abstract]

Investment in Change Healthcare Joint Venture

Healthcare Technology Net Asset Exchange

In the fourth quarter of 2017, the Company contributed the majority of its McKesson Technology Solutions businesses to form a joint venture, Change Healthcare JV, under a contribution agreement between McKesson and Change Healthcare Inc. (“Change”) and others, including shareholders of Change. In exchange for the contribution, the Company initially owned approximately 70% of the joint venture, with the remaining equity ownership of approximately 30% held by Change Healthcare Inc. The Change Healthcare JV was jointly governed by McKesson and shareholders of Change. The initial investment in the Change Healthcare JV represented the fair value of McKesson’s 70% equity interest in the joint venture upon closing of the transaction. In 2018, the Company recorded a pre-tax gain of $37 million (after-tax gain of $22 million) in operating expenses upon the finalization of net working capital and other adjustments. During 2018, it received $126 million in cash from Change representing the final settlement of the net working capital and other adjustments.

Initial Public Offering by Change Healthcare Inc.

On June 27, 2019, common stock and certain other securities of Change began trading on the NASDAQ (“IPO”). Change was a holding company and did not own any material assets or have any operations other than its interest in the Change Healthcare JV.

On July 1, 2019, upon the completion of its IPO, Change received net cash proceeds of approximately $888 million. Change contributed the proceeds from its offering of common stock of $609 million to the Change Healthcare JV in exchange for additional membership interests of the Change Healthcare JV (“LLC Units”) at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities of $279 million were used by Change to acquire certain securities of the Change Healthcare JV that substantially mirror the terms of other securities included in the offering by Change. The Change Healthcare JV, in return, used the majority of the IPO proceeds to repay a portion of the joint venture’s outstanding debt. As a result, McKesson’s equity interest in the Change Healthcare JV was diluted from approximately 70% to approximately 58.5% while Change owned approximately 41.5% of the outstanding LLC Units. Accordingly, in the second quarter of 2020, the Company recognized a pre-tax dilution loss of $246 million ($184 million after-tax) primarily representing the difference between its proportionate share of the IPO proceeds and the dilution effect on the investment’s carrying value. The Company’s proportionate share of income or loss from this investment was subsequently reduced as immaterial settlements of stock option exercises occurred after the IPO. These amounts were included in “Equity Earnings and Charges from Investment in Change Healthcare Joint Venture” in the Company’s consolidated statements of operations for the year ended March 31, 2020.

In the second quarter of 2020, the Company recorded a pre-tax other-than-temporary impairment (“OTTI”) charge of $1.2 billion ($864 million after-tax) to its investment in the Change Healthcare JV, representing the difference between the carrying value of the Company’s investment and the fair value derived from the corresponding closing price of Change’s common stock at September 30, 2019. This charge was included in “Equity Earnings and Charges from Investment in Change Healthcare Joint Venture” in the Company’s consolidated statement of operations for the year ended March 31, 2020.

Equity Method Investment in the Change Healthcare Joint Venture

The Company’s investment in the joint venture has been accounted for using the equity method of accounting on a one-month reporting lag. The Company’s accounting policy has been to disclose any intervening events of the joint venture in the lag period that could materially affect its condensed consolidated financial statements. Effective April 1, 2019, the Change Healthcare JV adopted the amended revenue recognition guidance. In the first quarter of 2020, the Company recorded its proportionate share of the joint venture’s adoption impact of the amended revenue recognition guidance of approximately $80 million, net of tax, in the Company’s opening retained earnings.

The Company recorded its proportionate share of loss from its investment in the Change Healthcare JV of $119 million, $194 million and $248 million in 2020, 2019 and 2018. The Company’s proportionate share of income or loss from this investment includes transaction and integration expenses incurred by the Change Healthcare JV and basis differences between the joint venture and McKesson including amortization of fair value adjustments primarily representing incremental intangible amortization and removal of profit associated with the recognition of deferred revenue. The proportionate share of loss from the joint venture recorded in 2018 was partially offset by a provisional tax benefit of $76 million recognized by the Change Healthcare JV primarily due to a reduction in the future applicable tax rate related to the December 2017 enactment of the 2017 Tax Cuts and Jobs Act. These amounts were recorded under the caption “Equity Earnings and Charges from Investment in Change Healthcare Joint Venture” in the Company’s consolidated statements of operations.

Separation of the Change Healthcare JV

On March 10, 2020, the Company completed the previously announced separation of its interest in the Change Healthcare JV. The separation was affected through the split-off of PF2 SpinCo, Inc. (“SpinCo”), a wholly owned subsidiary of the Company that held all of the Company’s interest in the Change Healthcare JV, to certain of the Company’s stockholders through an exchange offer (“Split-off”), followed by the merger of SpinCo with and into Change, with Change surviving the merger (“Merger”).

In connection with the Split-off, on March 9, 2020, the Company distributed all 176.0 million outstanding shares of common stock of SpinCo to participating holders of the Company’s common stock in exchange for 15.4 million shares of McKesson common stock which now are held as treasury stock on the Company’s consolidated balance sheet as of March 31, 2020. Refer to Financial Note 22, “Stockholders' Equity,” for more information. Following consummation of the exchange offer, on March 10, 2020, SpinCo was merged with and into Change Healthcare, and each share of SpinCo common stock converted into one share of Change common stock, par value $0.001 per share, with cash being paid in lieu of fractional shares of Change common stock. The Split-off and the Merger are intended to be generally tax-free transactions for U.S. federal income tax purposes. Following the Split-off, the Company does not beneficially own any of Change’s outstanding securities. In the fourth quarter of 2020, the Company recognized an estimated gain of $414 million related to the transaction which is included under the caption “Equity Earnings and Charges from Investment in Change Healthcare Joint Venture” in the Company’s consolidated statements of operations. The estimated gain was calculated as follows:



(In millions, except per share data)
Fair value of McKesson common stock accepted (15.4 million shares at $131.97 per share on March 9, 2020)	$	2,036
Investment in the Change Healthcare JV at exchange date	(2,096		)
Reversal of deferred tax liability	521
Release of accumulated other comprehensive attributable to the joint venture	(24		)
Less: Transaction costs incurred	(23		)
Estimated net gain on split-off of the Change Healthcare JV	$	414

At March 31, 2019, the Company’s carrying value of this investment was $3.5 billion. The carrying value included equity method intangible assets and goodwill which caused the Company’s investment basis to exceed its proportionate share of the Change Healthcare JV’s book value of net assets by approximately $4.2 billion at March 31, 2019.

Related Party Transactions

In connection with the formation of the Change Healthcare JV, McKesson, the Change Healthcare JV and certain shareholders of Change entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other agreements. Fees incurred or earned from the Advisory Agreement were not material for 2020, 2019 and 2018. Fees incurred or earned from the TSA were $22 million in 2020, $60 million in 2019 and $91 million in 2018. The Advisory Agreement was terminated in 2020.

In 2019, the Company renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability payable to the shareholders of Change. In exchange for the shareholders of Change agreeing to extinguish the liability, the Company agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from the Change Healthcare JV that would otherwise have been required to be made to the shareholders of Change. As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the noncurrent liability and recognized a pre-tax credit of $90 million ($66 million after-tax) in operating expenses in its consolidated statement of operations in 2019. At March 31, 2020 and 2019, the Company had no outstanding payable balance to the shareholders of Change under the TRA.

Revenues recognized and expenses incurred under commercial agreements with the Change Healthcare JV were not material during the years ended March 31, 2020, 2019 and 2018. At March 31, 2020 and 2019, receivables due from the Change Healthcare JV were not material.

Under the agreement executed in 2019 between the Change Healthcare JV, McKesson, Change, and certain subsidiaries of the Change Healthcare JV, McKesson has the ability to adjust the manner in which certain depreciation or amortization deductions are allocated among Change Healthcare Inc. and McKesson. McKesson exercised its right under the agreement and allocated certain depreciation and amortization deductions to Change for the tax year ended March 31, 2019 and estimated certain depreciation and amortization deductions for the tax year ended March 31, 2020. These allocated depreciation and amortization deductions may change as certain events occur, including the filing of the Change Healthcare JV tax return for the tax year ended March 31, 2020.

After McKesson’s separation of its interest in the Change Healthcare JV, the aforementioned TRA agreement requires the Change Healthcare JV to pay McKesson 85% of the net cash tax savings realized, or deemed to be realized, by Change resulting from the depreciation or amortization allocated to Change by McKesson. The receipt of any payments from the Change Healthcare JV under the TRA is dependent upon Change benefiting from this depreciation or amortization in future tax return filings. This creates uncertainty over the amount, timing and probability of the gain recognized. As such, the Company accounts for the TRA as a gain contingency, with no receivable recognized as of March 31, 2020.

Concurrent with the IPO in July 2019, Change Healthcare Inc. appointed two of the Company’s executive officers as well as McKesson’s former chief executive officer to its Board of Directors. These appointments had no impact on the equity method of accounting the Company applied to its investment in the Change Healthcare JV. Effective as of the time of the Merger, these individuals resigned from the Board of Directors of Change. Aside from the divestiture transaction discussed above, there were no material transactions with Change Healthcare Inc.