Healthcare Technology Net Asset Exchange

On June 28, 2016, we entered into a contribution agreement (“Contribution Agreement”) with Change Healthcare Holdings, Inc. (“Change”), a Delaware corporation, and others including shareholders of Change to form a joint venture, Change Healthcare, LLC (“Change Healthcare”), a Delaware limited liability company. On March 1, 2017, the transaction closed upon satisfaction of all closing conditions pursuant to the Contribution Agreement. Under the terms of the Contribution Agreement, we contributed the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the newly formed joint venture, Change Healthcare. We retained our RelayHealth Pharmacy (“RHP”) and Enterprise Information Solutions (“EIS”) businesses. Change contributed substantially all of its businesses to the joint venture excluding its pharmacy switch and prescription routing business. In exchange for the contribution, we own 70% of the joint venture with the remaining equity ownership held by Change shareholders. The joint venture is jointly governed by us and Change shareholders. Change Healthcare is a healthcare technology company which provides software and analytics, network solutions and technology-enabled services that will deliver wide-ranging financial, operational and clinical benefits to payers, providers and consumers.

McKesson and Change shareholders have agreed to take steps to launch an initial public offering of an entity which holds equity in Change Healthcare, subject to market conditions. Sometime thereafter, we expect to exit our investment in Change Healthcare through a distribution to McKesson shareholders.

Gain from Healthcare Technology Net Asset Exchange

We accounted for this transaction as a sale of the Core MTS Business and a subsequent purchase of a 70% interest in the newly formed joint venture. Accordingly, in the fourth quarter of 2017, we deconsolidated the Core MTS Business and recorded a pre-tax gain of $3,947 million (after-tax gain of $3,018 million) within operating expenses in our consolidated statements of operations. This transaction did not meet the criteria to be reported as a discontinued operation since it did not constitute a significant strategic business shift for the Company. During the first quarter of 2018, we recorded a pre-tax gain of approximately $37 million (after-tax gain of $22 million) under the caption, “Gain on Healthcare Technology Net Asset Exchange,” upon the finalization of net working capital and other adjustments. At June 30, 2017, we had a receivable of $126 million from Change Healthcare representing the final settlement of the net working capital and other adjustments.

Equity Method Investment in Change Healthcare

Our investment in the joint venture is accounted for using the equity method of accounting. We disclose intervening events at the joint venture in the lag period that could materially affect our consolidated financial statements, if applicable. There were no material intervening events at the joint venture during June 2017. During the first quarter of 2018, we recorded our proportionate share of loss from Change Healthcare of $120 million, which included transaction and integration expenses incurred by the joint venture and amortization expenses associated with equity method intangible assets. This amount was recorded under the caption, “Loss from Equity Method Investment in Change Healthcare,” in our condensed consolidated statement of operations.

At June 30, 2017, the carrying value of our investment was $3,855 million, which exceeded our proportionate share of the joint venture’s book value of net assets by approximately $4,768 million, primarily reflecting equity method intangible assets and goodwill and other fair value adjustments.

Summarized financial information (unaudited) of Change Healthcare is as follows:



(In millions)	Quarter Ended June 30, 2017
Revenues	$	865
Loss from Continuing Operations	(84		)
Net Loss	(84		)

Our proportionate share of Change Healthcare’s net loss as reported was $59 million ($84 million at our 70% ownership). Adjustments from their carrying value to our initial fair value basis of accounting resulted in a total reported net loss of $120 million for McKesson. The amortization of fair value adjustments included incremental intangible amortization and removal of profit associated with the recognition of deferred revenue, as well as basis differences in long-term debt.

Agreements with Change Healthcare and Related Party Transactions

At the closing of the transaction, McKesson, Change Healthcare and certain Change shareholders also 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 commercial agreements.

Pursuant to the TRA, McKesson may be required to make certain payments or may be entitled to receive certain payments related to the cash tax savings attributable to the utilization of certain tax attributes, including certain amortizable tax basis in software contributed by McKesson to Change Healthcare. At June 30, 2017 and March 31, 2017, we had a $136 million noncurrent liability payable to Change Healthcare shareholders associated with the TRA. The amount is based on certain estimates and could become payable in periods after a disposition of our investment in Change Healthcare. No such payments were required to be made or received during the first quarter of 2018.

Pursuant to the TSA, McKesson provides various transitional services to the joint venture to support certain operations including information technology, accounting and other administrative services. The total fees charged by us for such transition services were $37 million for the first quarter of 2018. Transition services fees are included within operating expenses in our condensed consolidated statements of operations.

Pursuant to the Advisory Agreement, the joint venture pays McKesson and Change shareholders an agreed upon amount for each fiscal year on a quarterly basis. The foregoing advisory and transaction fees are non-refundable and allocated to McKesson and Change shareholders based on their respective equity ownership percentages. In the first quarter of 2018, we did not earn material advisory fees and transaction fees.

Revenues recorded and expenses incurred under commercial arrangements with Change Healthcare were not material during the first quarter of 2018. At June 30, 2017 and March 31, 2017, receivables from and payables to the joint venture were not material.