McKesson 2010 Annual Report Download - page 22

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McKESSON CORPORATION
16
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.
Inflation can be the partial basis of some of our U.S. pharmaceutical distribution business’ agreements with
branded pharmaceutical manufacturers. If the frequency or rate of branded price increases slows, it could have a
material 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 a
material adverse impact on our results of operations.
Substantial defaults in payment, a material reduction in purchases or the loss of a large customer or group
purchasing organization could have a material 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 2010, sales to our ten largest customers accounted for approximately 53% of our total consolidated revenues.
Sales to our two largest customers, CVS and Rite Aid, represented approximately 15% and 12% of our total
consolidated revenues. At March 31, 2010, accounts receivable from our ten largest customers were approximately
45% of total accounts receivable. Accounts receivable from CVS and Rite Aid were approximately 14% and 10%
of total accounts receivable. As a result, our sales and credit concentration is significant. We also have agreements
with group purchasing organizations (“GPOs”), each of which functions as a purchasing agent on behalf of member
hospitals, pharmacies and other healthcare providers. A default in payment, a material reduction in purchases from
these, or any other large customers or the loss of a large customer or GPO could have a material adverse impact on
our financial condition, results of operations and liquidity.
We generally sell product to our customers on credit that is short-term in nature and unsecured. Any adverse
change in general economic conditions can adversely reduce sales to our customers, affect consumer buying
practices or cause our customers to delay or be unable to pay accounts receivable owed to us, which would reduce
our revenue growth and cause a decrease in our profitability and cash flow. Further, interest rate fluctuations and
changes in capital market conditions may affect our customers’ ability to obtain credit to finance their business
under acceptable terms, which would reduce our revenue growth and cause a decrease in our profitability.
Our Distribution Solutions segment is dependent upon sophisticated information systems. The implementation
delay, malfunction, or failure of these systems for any extended period of time could have a material adverse
impact on our business.
We rely on sophisticated information systems in our business to obtain, rapidly process, analyze and manage
data to, (1) facilitate the purchase and distribution of thousands of inventory items from numerous distribution
centers, (2) receive, process and ship orders and handle other product and services on a timely basis, (3) manage the
accurate billing and collections for thousands of customers and (4) process payments to suppliers. If these systems
are interrupted, damaged by unforeseen events or fail for any extended period of time, we could have a material
adverse impact on our results of operations.
Reduced capacity in the commercial property insurance market exposes us to potential loss.
In order to provide prompt and complete service to our major Distribution Solutions segment’s customers, we
maintain significant product inventory at certain of our distribution centers. While we seek to maintain property
insurance coverage in amounts sufficient for our business, there can be no assurance that our property insurance will
be adequate or available on acceptable terms. One or more large casualty losses caused by fire, earthquake or other
natural disaster in excess of our coverage limits could have an adverse impact on our results of operations.