McKesson 2005 Annual Report Download - page 28

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
large volume sales of pharmaceuticals primarily to a limited number of large self-warehousing customers whereby we order and subsequently
deliver bulk products from the manufacturer to the customers’ warehouses through a central distribution facility. These sales provide a benefit
to our customers in that they can use one source for both their direct store-to-store business and their warehouse business.
Canadian pharmaceutical distribution revenues increased reflecting market growth rates, favorable exchange rates and new business from
manufacturers which formerly engaged in direct distribution activities. On a constant currency basis, revenues from our Canadian operations
would have increased approximately 10% in 2005 compared to 2004.
Medical-Surgical Solutions segment distribution revenues increased slightly in 2005 as growth in revenues in the alternative site sector
exceeded a decline in revenues in the acute care sector. Increases in our alternate site sector include revenues of Moore Medical Corporation
(“MMC”), which we acquired in the first quarter of 2005. MMC is an Internet-enabled, multi-channel marketer and distributor of medical-
surgical and pharmaceutical products to non-hospital provider settings. Revenues for 2004 decreased nominally as increases in our primary and
alternate site sectors were more than fully offset by a decline in revenues in the acute care sector. Declines in our acute care sector reflect the
loss of the segment’s largest customer in the third quarter of 2004.
Provider Technologies segment revenues increased in 2005 reflecting greater demand for our clinical applications and imaging technology
offerings as well as growth in automation product installations. Revenues for 2004 decreased reflecting growth in software services and
hardware which were fully offset by decreases in sales of non-clinical solutions, longer installation periods required for certain large complex
clinical implementations and contracting changes in the segment’s automation business both of which had the effect of delaying revenue
recognition.
Gross Profit:
Gross profit increased by 7% in 2005 and 5% in 2004. As a percentage of revenues, gross profit decreased 37 and 76 basis points in 2005
and 2004. Gross profit margin decreased primarily reflecting a decline in the Pharmaceutical Solutions segment margin. Additionally, declines
in our gross profit margin were due to a higher proportion of revenues attributable to our Pharmaceutical Solutions segment, which has lower
margins relative to our other segments in 2004. Gross profit was also impacted by a $51.0 million provision for expected contract losses in
2003 within our Provider Technologies segment.
In 2005, gross profit margin for our Pharmaceutical Solutions segment was impacted by:
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Years Ended March 31,
(Dollars in millions) 2005 2004 2003
Gross Profit
Pharmaceutical Solutions $2,203.3 $2,076.9 $1,956.3
Medical-Surgical Solutions 653.6 603.9 589.0
Provider Technologies 607.8 567.4 557.2
Total $3,464.7 $3,248.2 $3,102.5
Gross Profit Margin
Pharmaceutical Solutions 2.89% 3.17% 3.69%
Medical-Surgical Solutions 22.58 21.49 20.72
Provider Technologies 46.69 47.19 45.71
Total 4.30 4.67 5.43
– a lower number of and average magnitude of price increases on branded pharmaceuticals in the current year compared to 2004,
– pressure on other buy side margins as the industry continues to evolve. Certain types of vendor product incentives and sources of supply,
such as certain inventory purchases in the secondary market, are not available at historical levels to the major distributors, which has the
impact of reducing gross margins,
– lower selling margins within our U.S. pharmaceutical distribution business which reflect a higher proportion of revenues attributable to
institutional customers, and continued competitive pressures which moderated