McKesson 2011 Annual Report Download - page 22

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McKESSON CORPORATION
16
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, third-party logistics
companies and large payer 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 that 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
software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers, care
management organizations, 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 a material adverse
impact on our results of operations.
A material reduction in purchases or the loss of a large customer or group purchasing organization, as well as
substantial defaults in payment by 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 2011, sales to our ten largest customers accounted for approximately 51% of our total consolidated revenues.
Sales to our two largest customers, CVS and Rite Aid, accounted for approximately 14% and 11% of our total
consolidated revenues. At March 31, 2011, accounts receivable from our ten largest customers were approximately
43% of total accounts receivable. Accounts receivable from CVS, Walmart and Rite Aid were approximately 13%,
10% and 9% 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, as well as with government entities and
agencies. A material default in payment, change in our customer mix, reduction in purchases, 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 our products and services to 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 may in
turn materially reduce our revenue growth and cause a material decrease in our profitability and cash flow. Further,
interest rate fluctuations and changes in capital market conditions may also affect our customers’ ability to obtain
credit to finance their business under acceptable terms, which in turn may materially reduce our revenue growth and
cause a decrease in our profitability.
Contracts with the U.S. federal government and other governments and their agencies pose additional risks
relating to future funding and compliance.
Contracts with the U.S. federal government and other governments and their agencies are subject to various
uncertainties, restrictions and regulations, including oversight audits by various government authorities and profit
and cost controls. Government contracts also are exposed to uncertainties associated with funding. Contracts with
the U.S. federal government, for example, are subject to the uncertainties of Congressional funding. Governments
are typically under no obligation to maintain funding at any specific level, and funds for government programs may
even be eliminated. As a result, our government clients may terminate our contracts for convenience or decide not
to renew our contracts with little or no prior notice. The loss of such contracts could have a material adverse impact
on our results of operations.