McKesson Corporation: A Financial Analysis
Lori Koch
Capella University
Finance and Value Creation
MBA-FP6016
Tim Price
November 09, 2014
McKesson Corporation: A Financial Analysis
John McKesson and Charles Olcott founded McKesson Corporation in 1833 in New York City as a business importing and selling wholesale therapeutic drugs and chemicals. It expanded to manufacture drugs and collaborated with subsidiaries to become a leading pharmaceutical distributor. It continued to expand laterally and globally, and in the 1990’s came full circle to focus on making the health care system that serves the population better, with higher quality, and lower costs. John Hammergren leads the company as Chairman, CEO, and President of McKesson. James Beer acts as Executive VP and CFO, and Nigel Rees is the Controller. Together, these men pave the way for McKesson to rise as one of the most successful publicly traded companies around.
Additionally, McKesson is currently ranked as 15th on the Fortune 500 list. It is labeled as a healthcare services and information technology company that helps shape the healthcare industry to provide robust systems that create operational efficiencies, shorter receivables turnaround times, and better customer experiences (McKesson Corporation, 2014). Its services include pharmaceutical and medical supply management, healthcare IT, and clinical business services.
McKesson is part of the services sector, specifically in the medical distribution or drug wholesale industry. This industry is in particularly high demand based upon the ever-increasing need to remedy illnesses and diseases (MSN Money: McKesson Corp, n.d.). A company in this sector is profitable if it creates a new product, whether it is a service or a drug. Additionally, once a drug or service’s availability is widespread, businesses fiercely compete on price. This industry is very saturated, with the four largest companies accounting for approximately half of revenue generated.
Within the drugs wholesale industry, McKesson has businesses in two core areas: distribution solutions and technology solutions. Distribution solutions area includes the subsidiaries that transport pharmaceutical drugs to retail and institutional partners. This area also includes the distribution of health care products and equipment. Eight businesses comprise distribution services, which has a presence in all 50 states in the U.S., Canada, and in Mexico (McKesson Corporation, 2013). The technology solutions area encompasses six businesses that provide software, services, and consulting to health care customers. These products help align the administrative and financial functions of a health care facility or office. McKesson has three major competitors in the drugs wholesale industry. AmerisourceBergen Corporation, Cardinal Health Inc., and Owens & Minor Inc. are the businesses that pose the largest threat to McKesson (MSN Money: McKesson Corp, n.d.). McKesson is the industry leader by double or more, compared to these companies, but its financials, planning, and strategy are key to its remaining in the top position.
The company further elevates itself amongst its competitors by teaming with business partners such as FairWarning, Inc. FairWarning helps McKesson to cultivate an environment of security, privacy, and compliance internally and with its customers ("FairWarning," 2009). This provides customers with an additional level of confidence and knowledge that McKesson takes its business seriously, as well as provides transparency to government entities.
When a vertical analysis is performed on McKesson, certain facts become known as a comparison to sales on the income statement (see Appendix A). First off, the cost of sales is the majority of the cost at 93.6%, 94.39%, and 94.77% for 2014, 2013, and 2012, respectively (McKesson Corporation, 2014). The shift towards generic pharmaceuticals and loss of market exclusivity is evident in 2012’s