McKesson 2006 Annual Report Download - page 51

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
We are subject to extensive and frequently changing local, state and federal laws and regulations relating to healthcare fraud. The federal
government continues to strengthen its position and scrutiny over practices involving healthcare fraud affecting the Medicare, Medicaid and
other government healthcare programs. Furthermore, our relationships with pharmaceutical manufacturers and healthcare providers subject our
business to laws and regulations on fraud and abuse. Many of the regulations applicable to us, including those relating to marketing incentives
offered by pharmaceutical or medical-surgical suppliers, are vague or indefinite and have not been interpreted by the courts. They may be
interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations. If
we fail to comply with applicable laws and regulations, we could suffer civil and criminal penalties, including the loss of licenses or our ability
to participate in Medicare, Medicaid and other federal and state healthcare programs.
Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Act”), the U.S. government recently proposed
changes in certain pharmaceutical reimbursement rates. We may be adversely impacted by these changes or changes that may be proposed in
the future under the Act. We are in the process of developing plans to mitigate any exposures from these changes in reimbursement rates and
the way our customers conduct their business under the Act. However, if we fail to successfully implement such plans, our business and the
results of operations may be adversely impacted.
Competition may erode our profit
In every area of healthcare distribution operations, our Pharmaceutical Solutions and Medical-Surgical Solutions segments face 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, these segments face
competition from various other service providers and from pharmaceutical and other healthcare manufacturers (as well as other potential
customers of the segments) which may from time to time decide to develop, for their own internal needs, supply management capabilities
which are provided by the segments and other competing service providers. Price, quality of service, and, in some cases, convenience to the
customer are generally the principal competitive elements in these segments. Our Provider Technologies 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 result in a decline in our profit.
Substantial defaults in payment or a material reduction in purchases of our products by large customers could have a significant
negative impact on our financial condition and 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, 2006, sales to our ten largest customers accounted for approximately 53% of our total consolidated revenues. Sales to our largest
customer, Caremark RX, Inc., represented approximately 11% of our 2006 total consolidated revenues. At March 31, 2006, accounts receivable
from our ten largest customers and Caremark RX, Inc. were approximately 48% and 11% of total accounts receivable. As a result, our sales and
credit concentration is significant. Any defaults in payment or a material reduction in purchases from this or any other large customer could
have a significant negative impact on our financial condition, results of operations and liquidity.
Our Pharmaceutical Solutions and Medical-Surgical Solutions segments are dependent upon sophisticated information systems. The
implementation delay, malfunction or failure of these systems for any extended period of time could adversely affect our business.
We rely on sophisticated information systems in our business to obtain, rapidly process, analyze and manage data to: facilitate the purchase
and distribution of thousands of inventory items from numerous distribution centers, receive, process and ship orders on a timely basis, manage
the accurate billing and collections for thousands of customers and process payments to suppliers. Our business and results of operations may
be materially adversely affected if these systems are interrupted, damaged by unforeseen events, or fail for any extended period of time.
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