McKesson 2014 Annual Report Download - page 21

McKESSON CORPORATION
18
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 international, 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.
In recent years, 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 therefore
we may be less able to negotiate price terms with suppliers. Many healthcare organizations have also 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, which in turn may
erode the diversity of our customer and revenue base.
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 2014,
sales to our ten largest customers accounted for approximately 48% of our total consolidated revenues. Sales to our largest customer,
CVS, accounted for approximately 16% of our total consolidated revenues. At March 31, 2014, trade accounts receivable from
our ten largest customers were approximately 32% of total trade accounts receivable. Accounts receivable from CVS were
approximately 12% of total trade 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.