McKesson 2008 Annual Report Download - page 36

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
29
Revenues increased 9% to $101.7 billion in 2008 and 7% to $93.0 billion in 2007. The growth in revenues was
primarily driven by our Distribution Solutions segment, which accounted for 97% of revenues.
U.S. pharmaceutical direct distribution and service revenues increased in 2008 primarily reflecting market
growth rates, new and expanded business and to a lesser extent, due to our acquisition of OTN. During the third
quarter of 2008, we acquired OTN, a U.S. distributor of specialty pharmaceuticals. In 2007, revenues increased
primarily reflecting market growth rates, expanded business and to a lesser extent, due to our acquisition of D&K.
These increases were partially offset by the loss of OTN as a customer. During the second quarter of 2006, we
acquired D&K, a wholesale distributor of branded and generic pharmaceuticals and over-the-counter health and
beauty products to independent and regional pharmacies, primarily in the Midwest. Market growth rates reflect
growing drug utilization and price increases, which are offset in part by the increased use of lower priced generics.
U.S. pharmaceutical sales to customers’ warehouses increased over the last two years primarily as a result of
new and expanded agreements with customers. In 2008, these increases were partially offset by a customer’ s loss of
a customer and reduced revenues associated with the consolidation of certain customers. Sales to retail customers’
warehouses represent large volume sales of pharmaceuticals primarily to a limited number of large self-warehousing
retail chain customers whereby we order bulk product from the manufacturer, receive and process the product
through our central distribution facility and subsequently deliver the bulk product (generally in the same form as
received from the manufacturer) directly to our customers’ warehouses. This distribution method is typically not
marketed or sold by the Company as a stand alone service; rather, it is offered as an additional distribution method
for our large retail chain customers that have an internal self-warehousing distribution network. Sales to customers’
warehouses provide a benefit to these customers because they can utilize the Company as one source for both their
direct to-store business and their warehouse business. We have significantly lower gross profit margin on sales to
customers’ warehouses as we pass much of the efficiency of this low cost-to-serve model on to the customer. These
sales do, however, contribute to our gross profit dollars.
The customer mix of our U.S. pharmaceutical distribution revenues was as follows:
2008 2007 2006
Direct Sales
Independents 13% 13% 12%
Institutions 30 29 32
Retail Chains 24 23 22
Subtotal 67 65 66
Sales to retail customers’ warehouses 33 35 34
Total 100% 100% 100%
From 2006 to 2007, the percentage of total direct and warehouse revenue attributed to the Company’ s retail
chain customers has grown faster than our other customer groups. This growth has resulted in a negative impact on
the Company’ s gross profit margin as the retail chain customer group typically has lower gross profit margins as
compared to our other customer groups. From 2007 to 2008, the percentage of total direct and warehouse revenue
attributed to the Company’ s retail chain customers grew slower than our other customer groups. This decline
resulted in a positive impact on the Company’ s gross profit margin. As previously described, a limited number of
our large retail chain customers purchase products through both the Company’ s direct and warehouse distribution
methods, the latter of which has significantly lower gross profit margin due to the low cost-to-serve model. When
evaluating and pricing customer contracts, we do so based on our assessment of total customer profitability. As a
result, we do not evaluate the Company’ s performance or allocate resources based on sales to customers’
warehouses or gross profit associated with such sales.