1. McKesson (MCK)
Healthcare Group

2. McKesson
Distributor
Provide PHARMACEUTICALS, MEDICAL SUPPLIES and INFORMATION TECHNOLOGIES
Distribution Solutions
Technology Solutions

3. Summary Industry Outlook Two segments of Company
Customers and Suppliers
Third Quarter Results
Competitors
Downsides
Increasing Shareholder Value

4. Healthcare Portfolio
Safer Play compared to riskier companies in the portfolio
Distribution and Technology
Celgene has a ton of upside but also a lot of downside
Cerner does much of the same thing as MCK’s technology sector. EHR ect. Cerner has been doing well and we have seen a 60% rise since we bought it! (might want to analyze that to sell at a high?!)
ALSO especially since the healthcare market in general is so prone to regulatory changes which we cannot predict/control, we felt it was a good idea to buy a company that has very little downside.
Biopharmaceuticals
Healthcare Providers

5. Industry Outlook WHOLESALE DRUG INDUSTRY OUTLOOK
Affordable Care Act increases the number of Americans covered by 32 million
Increased technology and communication allows the medical industry to better respond to consumers wants and needs
Specialty drugs (cancer, arthritis, etc) continue to have high profits
TECHNOLOGY INDUSTRY OUTLOOK
Overall positive outlook
Technology companies should hoard cash because they will need it to invest
Price fixing – largest competitor – AmerisourceBergen – has also been held responsible for price fixing. It is part of the industry, not a long term problem that will influence MCK’s sales and values.
WHOLESALE DRUG INDUSTRY OUTLOOK
Overall neutral outlook: increased demand for generics, etc but troubles concerning price fixing and general economic environment
Increased demand for generic drugs, medical supplies and technology
Affordable care act increases the number of Americans covered by 32 million; these people will be demanding medical products
US population is aging, which means greater demand for drugs
Increased technology and communication allows the medical industry to better respond to consumers wants and needs
Specialty drugs (cancer, arthritis, etc) continue to have high profits
Generics medications are the wave of the future; consumers don’t want to pay more than necessary
TECHNOLOGY INDUSTRY OUTLOOK
Overall positive outlook
Vice Chair of Deloitte says number one challenge is economy – economy is improving
Technology companies should hoard cash because they will need it to invest - McKesson has LOTS of cash
Affordable Care Act and the digitalization of medical records is a huge expansion opportunity for McKesson – they administer a large proportion of this technology

6. Current price: $106.83 52 week range: $84.65 - $111.55 Beta: .63
Market cap: $24.88 billion
Fell in 2008 and 2012 following elections, like most other stocks
December 2012 – received a $2.61 B defense contract
September 2012 – Arizona sues over price fixing
Current price: $107.42
52 week range: $ $111.55
Beta: .63
Market cap: $24.88 billion

7. Distributions Solutions (MDS)
Largest pharmaceutical distributor
in the world
Distributes:
Drugs
Medical-surgical supplies
Medical equipment
Health and beauty care products
Sells Pharmacy Software
Fragmented market →ONE STOP SHOP
Distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products throughout North America as well as providing specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, sells pharmacy software and provides consulting, outsourcing and other services.
McKesson also operates McKesson Canada and has a 49% interest in Nadro, S.A. de C.V. (“Nadro”), one of the leading pharmaceutical distributors in Mexico.
MDS revenues were up 1% in the third quarter of fiscal year ’13 driven mainly by growth in their U.S. pharmaceutical direct distribution and services business and growth in their Medical-Surgical distribution business.
Healthcare is a fragmented market, therefore MDS’ “one stop shop” gives them an edge over competitors such as Cardinal Health and AmeriSource.
Operates in Canada and has 49% interest in Nadro, a leading pharmaceutical distributors in Mexico.
“Our full year view of the operating performance in our Distribution Solutions segment is now better than our original expectations, and our full year view of the operating performance in the primary businesses in Technology Solution remains unchanged,” said John H. Hammergren, chairman and chief executive officer. “This operating strength is offset by the charge in our Canadian business and revenue deferral in our international technology business, and as a result we are updating our previous outlook for the fiscal year and now expect Adjusted Earnings per diluted share of $7.10 to $7.30 for the fiscal year ending March 31, 2013.”

8. Growth Opportunities Increase in Drug Distribution Volume Negatives
New Customers
Increased business with existing customers
Negatives
Faces strong competition in price
Loss of one large customer → large revenue swings
Lower-margin business than technology
. There are also estimated gains for medical-surgical, reflecting higher private label sales.
Negatives
Low-margin business.
Faces strong competition in price and service which may erode their profit.
-Loss of any one large customer could lead to large revenue swings.
LOWER MARGIN BUSINESS THAN TECHNOLOGY: MDS is moving towards a fee-based approach which will have a positive effect on predictability and a negative effect on profitability. Distribution agreements between distributors and most drug makers have over the years transitioned toward a more fee-based approach, with the distributors appropriately and predictably compensated for distribution. This has helped drug distributors by allowing them to reduce inventory levels. By holding less inventory, working capital requirements have declined, yielding higher operating cash flows. This will help aid the predictability of gross margins but not profitability. For profitability, they will look more towards McKesson Technology Solutions business.

9. Customers Top 10 customers accounted for 52% of total revenues
During 2012, sales to McKesson’s top ten customers accounted for approximately 52% of their total consolidated revenues.
Sales to their two largest customers, CVS Caremark Corporation (“CVS”) and Rite Aid Corporation (“Rite Aid”), accounted for approximately 16% and 10% of our total consolidated revenues. Although CVS and Rite Aid are a large percentage, that is pretty normal for this market and nothing to be alarmed about. Obviously a loss of any of their customers would negatively affect their revenue streams but we don’t think they are overweight in CVS and Rite Aid.
Below is great information, but might be too much info to share? Great in case they ask a question
At March 31, 2012, accounts receivable from their ten largest customers were approximately 49% of total accounts receivable.
Accounts receivable from CVS, Wal-Mart Stores, Inc. (“Walmart”) and Rite Aid were approximately 17%, 10% and 9% of total accounts receivable.
Top 10 customers accounted for 52% of total revenues
CVS: 16%
Rite Aid: 10%

10. Suppliers Top ten suppliers account for 45% of purchases
No supplier accounted for more than 6% of total purchases
Negative: Increased consolidation of pharmaceutical suppliers
Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which accounted for more than approximately 6% of our purchases in The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable. We believe that our relationships with our suppliers, on the whole, are good. The ten largest suppliers in 2012 accounted for approximately 45% of our purchases.
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.

11. Research and Development
Research and Development: Our development expenditures primarily consist of our investment in software held for sale. We spent $487 million, $471 million and $451 million for development activities in 2012, 2011 and 2010 and of these amounts, we capitalized 10%, 14% and 17%. Development expenditures are primarily incurred by our Technology Solutions segment. Our Technology Solutions segment’s product development efforts apply computer technology and installation methodologies to specific information processing needs of hospitals and other customers. We believe that a substantial and sustained commitment to such expenditures is important to the long- term success of this business.

12. McKesson Technology Solutions
No. 1 in medical management software and services to Payers
Serve 52% of all U.S. hospitals
77% with 200 or more bed
Top competitors: AmerisourceBergen Corp., Epic, Cerner Corp., Athenahealth Inc., Allscripts Healthcare Solutions Inc.
I deleted “3 percent of revenues because you can see it in the pie chart and you can just say it”
MTS delivers enterprise-wide patient care, clinical, financial, supply chain and strategic management software solutions, pharmacy automation for hospitals, as well as connectivity, outsourcing and other services, to health care organizations in N. America, the U.K., and other European countries.
Diversified technology segment positioned for stead long-term growth
200,000+ physician customers
1,000+ health care facilities using analytics
Revenues of the Technology Solutions unit should rise as consultations with hospitals on electronic health record systems translate into bookings
Stated that the freed up cash is most likely to be invested in higher-margined MTS segment.
Competes with other computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, hardware vendors and Internet-based companies with technology applicable to the health care industry.
Supplied more than 50% of all U.S. hospitals, but 77% of those with 200 or more beds, large hospitals.
Note on revenues: third quarter results reported that Technology Solutions were flat compared to prior year because of deferral in international business.
Competitor news: last five companies are forming a nonprofit group aimed at setting standards for exchanging data across their systems.
Competitive strengths include: geographical coverage, the scope and breadth of products and services, and it ability to offer package deals that include pharmaceutical and medical-surgical supplies.
AmerisourceBergen: a pharmaceutical services company, provides drug distribution and related healthcare services and solutions to pharmacy, physician, and manufacturer customers primarily in the United States and Canada.
Epic: private company develops and markets software for mid-size and large medical groups, hospitals, and integrated healthcare organizations.
Cerner Corp: designs, develops, markets, installs, hosts, and supports healthcare information technology, healthcare devices, hardware, and content solutions for health care organizations and consumers worldwide.
Athenahealth: provides physician practices with online practice management and electronic medical record services, combined with medical billing and other healthcare business services.
Allscripts: provides physician practices, hospitals, and other healthcare providers with practice management and electronic health record technology, including electronic prescribing, care management, and revenue cycle software.

13. Healthcare IT Market Growth
Public policy agenda: ACA
$17 billion in subsidies for hospitals that implement EMR
2015: penalties for hospitals without EMR
Public policy agenda:
Affordable Care Act stimulus package
$17 billion in subsidies for hospitals that implement EMR
2015 penalties for hospitals without EMR
Market growth
Source:

14. Third Quarter Results Revenues of $31.2 billion, up 1%
Third Quarter GAAP earnings per diluted share of $1.24, up 3%
Cash generation of $276 million, ended quarter with $2.7 billion
Distributions Solutions Revenues up 1%
Medical-Surgical distribution and services up 15%

15. Steady Revenue Growth
Compound annual growth rate (CAGR) is an average growth rate over a period of several years. It is a geometric average of annual growth rates:
CAGR = (ending value ÷starting value)1/(number of years - 1

16. Technology Solutions revenues increased in 2012 compared to 2011 primarily due to higher revenues for claims processing, increased revenues associated with the sale and installation of our software products, an increase in maintenance revenues from new and existing customers and a number of small acquisitions made during 2012.

17. Adjusted Earnings Per Share Growth

18. MCK vs. Competitors Ratios
Ticker
MKT Cap
P/E
EPS 1 YR Growth
Total Revenue
Rev 1 YR Growth
Op Margin
ROE
EV/EBITDA
MCK
24.88B
16.55
30.4%
123.53B
9.5%
1.87%
19.97%
8.51
ABC
11.99B
17.77
9.8%
80.76B
-0.6%
1.63%
27.01%
9.09
CAH
14.47B
12.45
11.9%
104.80B
4.8%
1.73%
17.68%
6.50
OMI
2.02B
17.03
-5.5%
8.91B
3.25%
2.32%
11.53%
8.07
Industry
Median
9.39B
17.57
9.80%
26.08B
4.78%
13.46%
8.70
Data from Bloomberg

19. Why MCK over its Competitors
Size: Dominant Market Share in a highly competitive industry
Strong Growth
Fair relative valuation

20. Downsides Reliance on major accounts
Risks associated with integration of acquisitions
Lower than expected drug price increases
Lawsuits
Generic Risks of potential policy changes
In addition, we distribute generic pharmaceuticals, which can be subject to both price deflation and price inflation. Healthcare and public policy trends indicate that the number of generic drugs will increase next year as a result of the expiration of certain drug patents. In recent years, our financial results have improved from our generic drug offerings combined with an increase in the number of generic drug formularies available in the marketplace. Changes in the availability, pricing trends or reimbursement of these generic drugs, or changes in the rate of increase in the number of generic drugs, could have a material adverse impact on our results of operations.

21. Create Shareholder Value
$11 Billion of Capital Deployed from FY09- FY12
Value Creating Acquisitions
Share Repurchases
Internal Capital Spending
Dividend

22. Acquisitions PSS World Medical October 2012 $2.1 billion transaction
Forecast $100M in cost synergies by year 4
Expect to add $0.15-$0.25 to Earnings per Share
“Extensive distribution capabilities, deep product and technology expertise, and a broad portfolio of business services to an expanding industry”
PSS World Medical: distributor of medical supplies to office based physicians, announced October , completed February 2013 for a purchase price of approx. $2.1 billion. PSSI has sales of $2.1B in the laboratory and private label markets. Expect the debt financed deal to add $0.15-$0.25 to MCK's EPS in year one after closing, with accretion rising significantly in the ensuing years. MCK forecasts $100M in cost synergies by year 4 (In the context of mergers, cost synergy is the savings in operating costs expected after two companies that compliment each other's strengths join).
Combining PSS Medical with McKesson’s Medical Surgical supply
American distributor of medical products, equipment, billing services and pharmaceutical related products to non-hospital healthcare providers.

23. Acquisitions Nov 2010 – US Oncology Jan 2012 – Katz Group
$2.16 B - cash
Jan 2012 – Katz Group
Canada
$920 M - cash
Integrated retail pharmacy network in Canada
Expect EPS accretion of $0.15 in FY 13
US Oncology in December 2010 for $2.1 Billion cash. US Oncology is a leading provider of products and services to oncologists
US Oncology, a leading integrated oncology company that serves one of the nation’s largest networks of community-based oncologists.
US Oncology currently distributes ~$2.4 billion worth of oncology pharmaceuticals annually, operates 83 comprehensive cancer centers, offers practice management services to practices, and has a network of ~1,300 affiliated physicians. Management estimates U.S. Oncology currently serves ~17% of all domestic cancer patients
Katz Group and Medicine Shoppe: Canadian drug distribution operations→ expect EPS accretion of $0.15 in FY 13
“This acquisition is a great example of using the strength of our balance sheet to reinforce the value we bring to our customers, while creating value for our shareholders.”

24. Valuation
20%/ 11 or 12%

25. Valuation (Mean)

26. Conclusion Key Investment Risks Strengths
Liable to lawsuits and government regulation
Strengths
One Stop Shop
Size gives it competitive edge
Evolving Healthcare IT Market
Commitment to increasing Shareholder Value
Cash
Fits well into the Portfolio