McKesson 2009 Annual Report Download - page 61

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
55
Healthcare Industry Consolidation: In recent years, the pharmaceutical suppliers have been subject to
increasing consolidation. As a result, a small number of very large companies control a significant share of the
market. Accordingly, we depend on fewer suppliers for our products and we are less able to negotiate price terms
with the suppliers. Many healthcare organizations have consolidated to create larger healthcare enterprises with
greater market power. If this consolidation trend continues, it could reduce the size of our target market and give the
resulting enterprises greater bargaining power, which may lead to erosion of the prices for our products and services.
In addition, when healthcare organizations combine they often consolidate infrastructure including IT systems and
acquisition of our clients could erode our revenue base.
Healthcare Reform Legislation: In addition to many of the targeted environmental and policy issues outlined
above, the national debate on whether and how to expand coverage to the uninsured, to improve the quality of care
and to reduce health costs and healthcare inflation will, if enacted in whole or in part, impose major changes to the
marketplace, some of which may impact either our results of operations or the manner in which we operate our
business.
Competition may erode our profit.
In every area of healthcare distribution operations, our Distribution Solutions segment faces strong competition,
both in price and service, from national, regional and local full-line, short-line and specialty wholesalers, service
merchandisers, self-warehousing chains, manufacturers engaged in direct distribution and large payor organizations.
In addition, this segment faces competition from various other service providers and from pharmaceutical and other
healthcare manufacturers (as well as other potential customers of the segment) which may from time to time decide
to develop, for their own internal needs, supply management capabilities which would otherwise be provided by the
segment. Price, quality of service, and in some cases, convenience to the customer are generally the principal
competitive elements in this segment.
Our Technology Solutions segment experiences substantial competition from many firms, including other
computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, hardware
vendors and Internet-based companies with technology applicable to the healthcare industry. Competition varies in
size from small to large companies, in geographical coverage and in scope and breadth of products and services
offered. These competitive pressures could have an adverse impact on our results of operations.
Our Distribution Solutions segment is subject to inflation in branded pharmaceutical prices and deflation in
generic pharmaceutical prices, which subjects us to risks and uncertainties.
Certain of our U.S. pharmaceutical distribution business’ agreements entered into with branded pharmaceutical
manufacturers are partially inflation-based. A slowing in the frequency or rate of branded price increases could
have an adverse impact on our results of operations. In addition, we also distribute generic pharmaceuticals, which
are subject to price deflation. An acceleration of the frequency or size of generic price decreases could also have an
adverse impact on our results of operations.
Substantial defaults in payment, a material reduction in purchases or the loss of a large customer could have
an adverse impact on our financial condition, results of operations and liquidity.
In recent years, a significant portion of our revenue growth has been with a limited number of large customers.
During the year ended March 31, 2009, sales to our ten largest customers accounted for approximately 52% of our
total consolidated revenues. Sales to our two largest customers, Caremark and Rite Aid, represented approximately
14% and 12% of our 2009 total consolidated revenues. At March 31, 2009, accounts receivable from our ten largest
customers were approximately 49% of total accounts receivable. Accounts receivable from Caremark and Rite Aid
were approximately 14% and 10% of total accounts receivable. We also have agreements with group purchasing
organizations, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other
healthcare providers. As a result, our sales and credit concentration is significant. A default in payment, a material
reduction in purchases or the loss of a large customer could have an adverse impact on our financial condition,
results of operations and liquidity.