McKesson 2009 Annual Report Download - page 35

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
29
U.S. pharmaceutical direct distribution and services revenues increased in 2009 compared with 2008 primarily
reflecting market growth rates (which include growing drug utilization and price increases, offset in part by the
increased use of lower priced generics), our acquisitions of OTN in October 2007 and McQueary Brothers in May
2008, expanded business with existing customers and a shift of revenues from sales to customers’ warehouses to
direct store delivery. U.S. pharmaceutical direct distribution and services revenues increased in 2008 compared with
2007 primarily due to market growth rates, new and expanded business and to a lesser extent, due to our acquisition
of OTN. OTN is a U.S. distributor of specialty pharmaceuticals and McQueary Brothers is a regional distributor of
pharmaceutical, health and beauty products to independent and regional chain pharmacies in the Midwestern U.S.
U.S. pharmaceutical sales to customers’ warehouses decreased in 2009 compared with 2008 primarily reflecting
a customer’s loss of business, the loss of a large customer and reduced revenues associated with the consolidation of
certain customers. Additionally, these revenues were also impacted by a shift to direct store delivery. These
decreases were partially offset by expanded business with existing customers. U.S. pharmaceutical sales to
customers’ warehouses increased in 2008 compared with 2007 primarily as a result of new and expanded
agreements with customers, which were partially offset by a customer’s loss of business 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 generally have
significantly lower gross profit margins 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:
2009 2008 2007
Direct Sales
Independents 13% 13% 13%
Institutions 32 30 29
Retail Chains 26 24 23
Subtotal 71 67 65
Sales to retail customers’ warehouses 29 33 35
Total 100% 100% 100%
From 2007 to 2009, the percentage of total direct and warehouse revenue attributed to the Company’s retail
chain customers declined compared to 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
generally has a 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.