You are on page 1of 9

The Battle for Healthcare Information

6. McKesson Corporation

6.1 Company Overview


McKesson, the largest health care company in the world,
NYSE MCK
reported revenue of $101.7 billion in 2008 from the sale of
health care systems, medical supplies, and pharmaceutical Founded 1833
products. It was the first time the company reported revenue
in excess of $100B. Marking its 175th year in January 2008, Headquarters San Francisco
McKesson is one of the oldest continually operating Total Revenue (2008) $101.7B
businesses in the U.S. According to some reports, the
company processes 80% of all prescriptions written in the Revenue Growth (YoY) 9.4%
U.S.
Net Profit (2008) $990M
McKesson has offices throughout North America, plus Profit Growth (YoY) 8.4%
international offices in Ireland, France, the Netherlands, the
U.K., and Australia. The company operates in two business Employees (2008): 33,000
segments: Distribution Solutions and Technology Solutions. In
Fortune 500 #18
2008, McKesson derived 97% of its revenue from its
distribution business segment.

Distribution Solutions – This business segment


distributes prescription drugs, medical-surgical supplies 2008 Annual Report
and equipment, and health and beauty care products Extending our record of
throughout North America. The company has distribution superior stockholder returns
agreements with CVS Caremark, Kinney Drugs, Rite Aid,
Safeway, Cigna, Humana, Costco, and Wal-Mart. This Fiscal year 2008 was a year of
segment also provides specialty pharmaceutical solutions milestones for McKesson. In January, we
for biotech and pharmaceutical manufacturers, sells marked our 175th anniversary, a
pharmacy software, and provides consulting, outsourcing distinction rarely achieved in American
and other services. Also included here is the company’s business. Our revenues grew 9% to
49% interest in Nadro, the leading pharmaceutical reach $101.7 billion, exceeding $100
distributor in Mexico, and its 39% interest in Parata billion for the first time. Perhaps most
gratifying, we received numerous awards
Systems, which sells automated pharmacy and supply and significant recognition from our
management systems and services to retail and customers and industry groups for our
institutional outpatient pharmacies. superior service and solutions. Our
progress in fiscal year 2008 continued
Technology Solutions – This segment delivers our track record of superior financial
enterprise-wide clinical, patient care, financial, supply performance and stockholder returns.
chain, and strategic management software solutions, During the five-year period ending March
pharmacy automation for hospitals, as well as 31, 2008, both our revenues and
connectivity, outsourcing, and other services. Also earnings per share grew at a compound
included here is McKesson’s clinical auditing, annual growth rate exceeding 8%.
compliance, and medical management software
– John H. Hammergren
businesses and care management programs. Customers Chairman and Chief Executive Officer
include hospitals, physicians, homecare providers, retail
pharmacies, and payors in North America, Europe, and
Asia Pacific.
© Fuld & Company 2009 Healthcare War Game Briefing Book 48
The Battle for Healthcare Information

Since 1950s, McKesson has derived a growing proportion of its income from medical technology
rather than pharmaceuticals. This culminated in its purchase of medical information systems firm
HBO & Company (HBOC) in 1999. Irregularities in accounting at HBOC produced a one-day, $8.6
billion plunge in McKesson’s stock on April 28, 1999. Shareholders lost nearly half of the value of
their holdings. Several McKesson and HBOC executives were dismissed and prosecuted by the
New York State comptroller, who was the lead plaintiff among thousands of others. Current
chairman and CEO John Hammergren, who led McKesson’s wholesale drug unit at the time, was
promoted to head the company. McKesson Technology Solutions has continued to increase its
market share through acquisitions, notably Per Se Technologies, RelayHealth, and Practice
Partner. Today, McKesson is one of the leading healthcare IT companies in the U.S., with software
and hardware in more than 70% of hospitals with more than 200 beds. KLAS Enterprises, an
independent monitor of healthcare IT vendors, rated 18 McKesson products in the top three in their
categories in its 2007 report.

McKesson at a glance
6.2 Recent Acquisitions • Delivers more than $1 billion in medi-
cines to pharmacies, hospitals, physi-
From fiscal year 2006 through 2008, McKesson spent cian offices, and other healthcare sites
$3.1 billion on strategic acquisitions. Many of these were every week — one-third of the medi-
smaller investments that improved the company’s value cines used each day in North America.
proposition to customers in both distribution and • Distributes more than 150,000 medical-
information technology. In his 2008 letter to shareholders, surgical products — ranging from
Hammergren noted three major investments the company gloves and bandages, to surgical las-
made in the past three years that, as he said, “create ers, to flu vaccines — to more than
opportunities to increase stockholder value.” 300,000 physician offices and other
customers.
In October 2007, McKesson acquired Oncology • Provides bar-code scanning solutions
Therapeutics Network (OTN) of San Francisco for $531 in hospitals that prevent 700,000 medi-
million. OTN is a leading distributor of specialty cation errors every week.
pharmaceuticals, McKesson believes this purchase • Helps insurers, including the top 25
“significantly enhanced” its presence in what the “fastest- managed care organizations, pay
growing sector of the pharmaceutical market.” In January claims for more than 160 million plan
2007, McKesson acquired Per-Se Technologies of members.
Alpharetta for $1.8 billion, the company’s largest IT
• Provides physician portal for secure
acquisition since 1999. Per Se is a leading provider of access to patients’ records, with current
financial and administrative solutions for hospitals, usage of 3.7 million visits per month.
physicians and retail pharmacies. In 2006, McKesson
acquired D&K Healthcare of St. Louis, expanding its Source: McKesson 2008 Annual Report
footprint among independent pharmacies in the Midwest.

In February 2007, McKesson acquired Physician Micro Systems, known as Practice Partner, a
provider of integrated software for electronic health records, medical billing and appointment
scheduling for independent physician practices. Terms of the agreement were not disclosed. The
McKesson press release said that this acquisition, along with Per-Se Technologies, demonstrates
the company’s “commitment to provide a complete solution – including software, billing and
collection services, supplies and connectivity – to physician practices regardless of size, specialty or
geographic location.” Pamela Pure, president of McKesson Technology Solutions, said the
company had established “a technology footprint” with 20% of U.S. physicians.

In his 2008 letter to shareholders, CEO Hammergren cited two other acquisitions that “advance our
long-term strategy,” one in distribution and the other in information technology. McKesson increased
the size of its Midwest distribution footprint even further by acquiring McQueary Brothers Drug
Company, a Springfield, Missouri-based distributor to more than 400 independent and regional
chain pharmacies. This move also expands McKesson’s distribution profile in the independent
pharmacy segment, opening up new opportunities for building out McKesson’s Health Mart
franchise and OneStop Generics program. In its technology business, the company acquired
© Fuld & Company 2009 Healthcare War Game Briefing Book 49
The Battle for Healthcare Information

Rosebud Solutions of Ann Arbor, a provider of software that tracks and manages instruments,
endoscopes, tissue implants for surgical services, as well as medical crash carts and mobile
equipment. McKesson believes Rosebud Solutions will help hospitals create efficient workflow
processes that improve patient safety and reduce surgical delays and costs. Rosebud offerings
complement McKesson’s existing materials management and surgical services solutions.

The company’s 2008 annual report presents a bold summary of McKesson’s position: “Drawing on
our formidable array of assets, we are serving customers in ways that truly set McKesson apart in
the marketplace. We are the healthcare industry’s most complete solution provider, with the ability
to deliver distribution and supply chain services, software solutions, claims processing capabilities,
consulting services, pharmacy management systems, hospital automation, and disease
management programs.... We are combining our capabilities in bold new ways to create unique,
innovative solutions that expand and redefine the segments in which we compete and drive
improvements across the entire healthcare spectrum.”

6.3 Strategic Partnerships and Agreements


McKesson continues to enter into new partnerships with
leading healthcare and technology companies to McKesson and Microsoft
reinforce and extend its market position.
“Until now, the ability for consumers to
Distribution Agreements – During 2008, McKesson access and share appropriate health
renewed pharmaceutical distribution agreements with information online has not been possible.
these key partners: CVS Caremark, Rite Aid, Safeway, As a result, personal health records
(PHRs) have not been broadly adopted or
Cigna, Humana and Costco. McKesson has a long-
consistently used. Our relationship with
standing supply agreement with Wal-Mart Stores, the Microsoft can change that. HealthVault
world’s largest retailer. It also is a supplier to Target. offers consumers a convenient and
accessible way to store and manage their
Microsoft Corp. – In August 2008, Microsoft healthcare and wellness data in one
announced a strategic collaboration between its central place. The RelayHealth network
HealthVault service and McKesson’s RelayHealth then connects the consumer’s portfolio of
connectivity business. RelayHealth’s core services information with the care provider and
enable patients to schedule appointments online, unifies the management of the personal
request prescription refills, pay bills, obtain results, and health record.”
consult with their doctors online for non-urgent care.
– Pamela Pure, President
With this new combined solution, physicians will be able
McKesson Technology Solutions
to use RelayHealth through a Web browser as the initial August 2008
step toward clinical automation of their practice. The
service is designed to integrate with EMR systems
already in use. For patients, the combined solution will
provide access to their personal health information and online communications with their physicians.

St. Luke’s Episcopal Healthcare System – McKesson promotes its relationship with St. Luke’s in
Houston as an example of its growing number of “One McKesson” customers who use a
combination of McKesson-provided information technology, automation and pharmaceutical
distribution solutions. St. Luke’s recently added extensive clinical IT capabilities to its three hospitals
and 18 clinics: more than 300 McKesson AcuDose-Rx® medication dispensing cabinets, a software
and hardware solution that drives patient safety and process efficiency. This was the largest
contract ever signed in McKesson’s automation business. St. Luke’s is also a McKesson
pharmaceutical distribution customer.

ProMedica – In March 2008, McKesson signed a contract with this Ohio-based network of ten
hospitals to provide an array of clinical solutions, pharmacy automation and medication distribution
services.

© Fuld & Company 2009 Healthcare War Game Briefing Book 50


The Battle for Healthcare Information

Blue Cross and Blue Shield of Massachusetts – In February 2008, BCBSMA, an independent
not-for-profit health care benefits company, licensed McKesson’s InterQual suite of products.

Proventys – In February 2008, McKesson entered into a relationship with Proventys, a


personalized medicine knowledge service provider, under which McKesson will incorporate
Proventys’ risk prediction capabilities into its core clinical decision support solutions.

Community Health Systems (CHS) – In January 2008, McKesson signed a national agreement
with CHS, one of the largest operators of general acute care hospitals in non-urban and mid-size
markets in the US. McKesson will deploy clinical information systems in over 40 of its larger
hospitals.

Aetna – In January 2008, McKesson announced a five-year agreement with Aetna, a leading health
care benefits company, under which Aetna will add McKesson’s ClaimsXten software to its claims
management capabilities.

Amerinet – In October 2007, the company signed an agreement with this national healthcare
purchasing organization to provide central pharmacy automated distribution systems. The
agreement gives Amerinet members access to McKesson’s barcode-based medication packaging
solutions.

6.4 Distribution Products and Services


In the U.S., McKesson’s has a network of 29 pharmaceutical distribution centers, as well as a
master redistribution center, a strategic redistribution center, and two repackaging facilities.
McKesson Canada, the largest pharmaceutical distributor in Canada, has a network of 17
distribution centers, providing logistics and distribution to more than 800 manufacturers. The
company has a 49% share of Nadro, Mexico’s leading pharmaceutical distributor. McKesson tailors
its distribution solutions for retail national accounts, independent retail pharmacies, and institutional
healthcare providers.

Retail National Accounts

• Central Fill – Prescription refill service that enables


pharmacies to refill prescriptions remotely, reducing McKesson portal handles $2
inventory levels and improving customer service. billion in drug orders
every month
• Redistribution Centers – Two facilities totalling
420,000 square feet offers access to inventory for For larger pharmacies and chains,
single-source warehouse purchasing, including McKesson invests in strategic programs
pharmaceuticals and biologicals. These centers also like central fill, bulk repackaging and
provide the foundation for a two-tiered distribution pharmacy management systems to help
network that supports “best-in-class” direct store our customers maximize their operational
delivery. and financial success. The acquisition of
Per-Se significantly enhanced our
pharmacy systems offering by providing a
• RxPakSM – Bulk repackaging service that leverages
new, contemporary software platform for
McKesson’s purchasing power and supplier retail chain and mail order customers. We
relationships to provide pharmaceuticals at reduced support all pharmacy customers with a
prices, help increase inventory turns, and reduce robust infrastructure that includes Supply
working capital investment. Management Online, our customer
Internet portal that accounts for more
• EnterpriseRx™ – Launched in July 2008, this is a than $2 billion in pharmaceutical orders
complete pharmacy management system that each month.
provides control over the entire prescription filling
process while supporting administration and – McKesson 2008 Annual Report
management functions.

© Fuld & Company 2009 Healthcare War Game Briefing Book 51


The Battle for Healthcare Information

Independent Retail Pharmacies

• Health Mart® –McKesson’s franchise program helps independent pharmacies attract new
business, maximize the value of existing customer relationships and enhance operational
efficiency. In FY 2008, Health Mart grew by more than 600 new stores, bringing the total to more
than 1,850. McKesson credits Health Mart for contributing to its 11%YoY growth in sales for
generics, significantly above overall market growth for generics, according to McKesson.

• AccessHealth® – These comprehensive managed care and reconciliation assistance services


are designed to help independent pharmacies save time, access competitive reimbursement
rates, and improve cash flow.

• OneStop Generics® – Pharmaceutical purchasing program helps pharmacies maximize their


cost savings with a broad selection of generic drugs and lower up-front pricing.

• Prefer Rx – Through this discount program, McKesson offers aggressive prices on more than
100 branded drugs, helping retail independent pharmacies increase margins and eliminate
rebate paperwork.

Institutional Healthcare Providers

• Fulfill-Rx™ – Ordering and inventory management system that integrates McKesson


pharmaceutical distribution services with its automation solutions, helping hospitals optimize the
processes supporting unit-based cabinet replenishment and inventory management.

• McKesson Patient Relationship Solutions (MPRS), introduced in FY2008, helps pharmacists


counsel patients to stay on their prescribed medications. MPRS provides 225 adherence
programs that are supported by more than 50 pharmaceutical manufacturers. The program’s
LoyaltyScript® card is used by 11,000 patients each day. McKesson is piloting a Medication
Therapy Management program to improve communications among pharmacists, physicians and
payors to improve patient outcomes by helping patients increase medication adherence and
reduce adverse drug events.

6.5 Technology Products and Services


The portfolio in McKesson’s Technology Solutions segment addresses a wide array of healthcare,
clinical, and business performance needs ranging from medication safety and information access to
revenue cycle management, resource utilization, and physician adoption of electronic health
records. For physicians, McKesson promotes its practice management and EHR solutions as
“complete solutions for physician practices of every size, specialty, or
geographic location.”

• Practice Partner® – This integrated software solution, marketed to


independent physician practices, provides electronic health records,
medical billing, and appointment scheduling. Practice Partner’s EHR
system is certified by the Certification Commission for Healthcare
Information Technology (CCHIT). The solution includes a
sophisticated multi-clinic scheduler and a comprehensive practice
management system that provides billing and collection services,
supplies, and connectivity services. According to McKesson, more
than 1,500 practices representing approximately 6,000 physicians,
are using Practice Partner. McKesson acquired Practice Partner
from Physician Micro Systems in February 2007. Terms of the agreement were not disclosed.

© Fuld & Company 2009 Healthcare War Game Briefing Book 52


The Battle for Healthcare Information

• Horizon Clinicals® – This comprehensive clinical


management solution includes a clinical data repository, McKesson’s Momentum
decision support, physician order entry, point-of-care
“We’ve built strong momentum
documentation with bar-coded medication administration, with our Connecting
enterprise laboratory, radiology, pharmacy, surgical SM
Physicians strategy, which is
management, an emergency department solution, and an focused on helping hospitals to
ambulatory EHR system. Horizon Clinicals also includes reduce traditional EHR adoption
solutions to simplify physician access to patient barriers by collaborating with
information such as a Web-based physician portal and local practices to provide a single
wireless devices that draw on information from the record for inpatient and
hospital’s information systems. The Horizon Clinicals ambulatory care. With Practice
suite is also marketed to homecare providers, including Partner, McKesson is now
positioned to automate
telehealth and hospice.
independent physician offices
and to deploy EHR technology to
• RelayHealth® – This is McKesson’s network-based help drive safer, more efficient
solution for streamlining clinical, financial and care.”
administrative communication between patients,
providers, payors, pharmacies, and financial institutions. – Pamela Pure, President
RelayHealth operates as a neutral partner in an open McKesson Technology
network environment, according to McKesson, offering Solutions
interoperability among all organizations, systems, and February 2007
solutions to improve clinical communication, care
delivery, and cash collection. RelayHealth enables online
consultation between physicians by patients, electronic prescribing by physicians, point-of-
service resolution of pharmacy claims by payors, pre-visit financial clearance of patients by
providers, and post-visit settlement of provider bills by payors and patients. RelayHealth
processes more than 12 billion financial and clinical transactions annually and 70% of all retail
pharmacy claims nationwide. McKesson acquired this technology in 2007 and combined it with
some of the assets acquired from Per-Se to form its current RelayHealth offering. McKesson
promotes RelayHealth connectivity solutions in all of its customer segments. In the physician
segment, the company promotes two “innovations that provide cost and efficiency benefits to
physicians and improve patient care”: e-prescribing and online patient-doctor consultations,
branded by McKesson as WebVisits®.

6.6 Key Executives


John H. Hammergren, 49, chairman, president, and CEO, McKesson

Hammergren has been the chairman of McKesson since 2002, president and CEO
since 2001. He was co-president/CEO of the company from 1999 to 2001.
Previously, he was the executive vice president of the company and
president/CEO of the Supply Management Business from January 1999 to July
1999, group president of McKesson Health Systems from 1997 to 1999, and vice
president of the company since 1996. He also is a director of Nadro and Verispan
entities in which McKesson holds interests, and serves on Hewlett-Packard’s
board of directors.

"McKesson is helping transform the health care industry


into a modern, efficient, and quality-driven system."

– John H. Hammergren

© Fuld & Company 2009 Healthcare War Game Briefing Book 53


The Battle for Healthcare Information

Paul C. Julian, 52, executive vice president, group president, McKesson Distribution
Solutions

Julian has served in this role since 2004. Previously, he was senior vice president since 1999 and
president of the Supply Solutions Business since 2000. Prior to joining McKesson, Julian held a
variety of senior management positions in healthcare companies, including Owens and Minor and
Stuart Medical, where he served in several where he served in several roles including group vice
president and chief operating officer.

Pamela Pure, 47, executive vice president, president, McKesson Technology Solutions

Pure has served in this role since 2004. She joined McKesson in 2001 as group president, Product
Development and Support. She has more than 20 years of operating and executive experience in
the health care information technology industry. Before joining McKesson, Pure was the chief
operating officer for the Channel Health subsidiary of IDX Systems. Previously, she held a series of
management, product development and marketing positions at Shared Medical Systems.

Randall N. Spratt, 56, executive vice president, chief information officer, McKesson

Spratt has been with McKesson for more than 18 years, most recently as chief process officer for
McKesson Technology Solutions managing business development, information technology, and
strategic planning officers, as well as the technology services business. Prior to joining McKesson,
Spratt held executive positions of increasing responsibility at the start-up Advanced Laboratory
Systems, where he ultimately became the chief operations officer. After the acquisition of ALS in
1999, Spratt took on responsibility for HBOC’s laboratory systems business. After the acquisition of
HBOC by McKesson in 1999, he became part of the reconstructed management team.

Marc E. Owen, 48, executive vice president, Corporate Strategy and Business Development

Owen has served in this role since 2004. Prior to joining McKesson, he was a senior partner at
McKinsey. He was also a founding partner responsible for establishing McKinsey’s presence in
Silicon Valley and a leader of McKinsey's Business Technology office globally. He was also CEO of
MindCrossing. Owen is currently a director of Nadro, Verispan, Proventys, and MedVantx.

McKesson’s non-executive board of directors has nine members, including David M. Lawrence, 66.
Dr. Lawrence has been a director of McKesson since 2004. He served as chairman of the board of
Kaiser Foundation Health Plan and Kaiser Foundation Hospitals from 1992 to 2002, when he retired
as chairman emeritus. He served as CEO of Kaiser Foundation Health Plan and Kaiser Foundation
Hospitals from 1991 to 2002. Dr. Lawrence held a number of positions with these organizations,
including vice chairman of the board and chief operating officer. Dr. Lawrence is also a director of
Agilent Technologies, Dynavax Technologies, and Raffles Medical Group.

© Fuld & Company 2009 Healthcare War Game Briefing Book 54


The Battle for Healthcare Information

6.7 Selected Financial Statements

Source: McKesson 2008 Annual Report and 10-K

Stock Repurchase Plan and Doubled Dividends: Over the past three years, McKesson has
repurchased $3.7 billion of outstanding McKesson common stock. The company is also committed
to returning capital to stockholders, and earlier this year, doubled the quarterly dividend from 6
cents to 12 cents per share.

Ten Customers Account for 53% of Total Revenue: In recent years, a significant portion of
McKesson’s revenue growth has been with a limited number of large customers. In 2008, sales to
its ten largest customers accounted for approximately 53% of total consolidated revenues. Sales to
the two largest customers, CVS Caremark Corp. and Rite Aid Corp., accounted for 14% and 13% of
total consolidated revenues.

Ten Suppliers Account of 48% of Purchases: McKesson obtains pharmaceutical and other
products from various manufacturers, none of which accounted for more than approximately 9% of
its purchases in 2008. The company’s ten largest suppliers in 2008 accounted for approximately
48% of its purchases.

Three-Year Summary of Revenues

Revenues increased 9% to $101.7 billion in 2008 and 7% to $93.0 billion in 2007. The growth in
revenues was primarily driven by the Distribution Solutions segment, which accounted for 97% of
revenues.

© Fuld & Company 2009 Healthcare War Game Briefing Book 55


The Battle for Healthcare Information

Five-Year Revenue Highlights

Source: McKesson 2008 Annual Report and 10-K

© Fuld & Company 2009 Healthcare War Game Briefing Book 56

You might also like