Mck proposal

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This report has been downloaded from the KSU Student Managed Investment Fund. LLC archives, and was prepared by student analysts; and any
opinions contained herein are solely the opinions of those analysts.
Information contained herein, including but not limited to research, valuations, calculations, estimates and any other material or sources, is
believed to be reliable, however its accuracy and completeness is not warranted or guaranteed, and past performance is not indicative of future results. These
materials are provided for informational purposes only and should not be used or construed as an offer to sell or a solicitation of an offer to buy any security. The
KSU Student Managed Investment Fund, LLC. is not acting as, nor is it registered as an investment adviser.
McKesson Distribution Solutions
MCK’s Distribution Solutions distributes ethical and proprietary drugs and health and beauty care
products in North America and Internationally. This segment comprises three main businesses:
KSU Student Managed Investment Fund LLC.
Jerry Vieux
Vieuxjerry21@gmail.com
Senior Analyst - Healthcare
Target Range – $201.79 – 249.42
Current Price – $181.32
October 24, 2015
Proposal
McKesson Corporation (MCK)
Rating: BUY
Ticker
(NYSE)
TRP
Industry
Average
Current
Price 181.32
Target
Range
$201.79 -
$249.42 -
Market cap 42.02B -
Trailing P/E 20.33 34.4
GM 72.7% -
ROE 17.87% 7.4
Beta 1.05 -
Dividend
Yield 0.53% -
Price/Book 5.0 4.8
(Review in Bloomberg)
Company Profile
McKesson Corporation is one of the largest
healthcare services company in North America.
MCK plays a vital role within the health care sector
providing services to more than 50% of American
hospitals and over 20% of physicians. MCK
operates in two main segments: McKesson
Distribution Solutions and McKesson Technology
Solutions. McKesson Distribution Solutions is the
prominent segment with total revenue of $176
billion, or 98% of 2015 fiscal year revenue.
McKesson Technology Solutions accounted for $3.1
billion dollars in revenue, or 2% of 2015 fiscal year
revenue.
Last February, MCK purchased 76% of Celesio’s
outstanding shares for $4.5 billion in cash. Through
the acquisition of Celesio, MCK gained a strong
European presence in the healthcare distribution
sector. Together, McKesson and Celesio serve over
120,000 pharmacies and hospitals worldwide on a
daily basis. MCK expects to realize annual synergies
between $275 and $325 million by the fourth year
of the deal.
Management
Chairman of the Board, CEO since 2008:
John Martin
President of, CEO since 2008:
John Milligan
Chief Financial Officer, Executive VP since 2014:
Robin Washington
Upper-level management ages range from 49-81
yrs.

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North America pharmaceutical Distribution and Services, International Pharmaceutical Distribution
and Services, and Medical Surgical Distribution. MCK’s North America Pharmaceutical Distribution
and Services business operates customer locations in all 50 states in the U.S and Puerto Rico, and
Canada through a large network of more than 45 distributions centers. MCK is the industry leader
in order quality and fulfillment with 99.99 % adjusted accuracy. MCK’s International
Pharmaceutical Distribution and Services business provides pharmaceutical and healthcare
services to retail pharmacies and institutional customers in Europe. MCK’s European wholesale
network, which comes mainly from its acquisition of Celesio, comprises approximately 130
branches and delivers close to 130,000 products to over 65, 000 pharmacies on a daily basis in 10
different countries. Finally, the Medical Surgical Distribution business is a leading provider of
medical-surgical supply distribution, equipment, logistics and other services to healthcare
providers including physicians’ offices, surgery centers, and homecare.
McKesson Technology Solutions
The Technology Solutions segment delivers enterprise-wide clinical, patient care, supply chain and
strategic management software solutions, as well as connectivity, outsourcing and other services,
including remote hosting and managed services, to healthcare organizations throughout North
America and Europe. Only 2% of MCK FY 2015 revenue comes from this segment, however this
represents a growth opportunity for MCK as healthcare IT continues to gain market share within
the sector.
Management
John H Hammergren (Chief Executive Officer) – Mr. Hammergen is Chairman, president, and
Chief Executive Officer of MCK. He was appointed CEO in 2011. Under his tenure as CEO, MCK has
more than quadrupled its revenue to $179 billion. Mr. Hammergen has been with MCK since 1996.
James Beer (Chief Financial Officer)- Mr. Beer is Executive Vice-President, and Chief Financial
Officer of MCK. Prior to joining MCK, he served as the CFO of Symantec Corporation and American
Airlines.

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Recent News
Walgreens Will Buy Rival Rite Aid In $17.2 Bil Deal (updated News after proposal)
Walgreens Boots Alliance confirmed late Tuesday that it is acquiring smaller rival, No. 3
U.S. drugstore chain Rite Aid, for $9 a share in cash. The deal, worth $17.2 billion in total
enterprise value including assumed debt, is seen as adding to adjusted per-share earnings
in its first full year after completion, said Walgreens (NASDAQ:WBA), which also expects
synergies exceeding $1 billion. (Investors.com)
UDG Healthcare to sell two units to McKesson for $466 million
UDG Healthcare Plc (UDG.L) said it would sell its Irish drug distribution businesses to U.S.
drug wholesaler McKesson Corp (MCK.N) for 407.5 million euros ($466 million) to cut debt
and raise funds for acquisitions. (Reuters.com)
Industry Outlook
The dynamics of the Healthcare have not changed over the past couple years. The key
market drivers continue to be: The world’s aging population, the increasing number of
people with chronic diseases, technological innovations, and mergers and acquisitions.
MCK’s growth strategy incorporates all these components, which is why I believe that MCK
is poised for tremendous growth in the future. In 2014, Worldwide and U.S drug sales rose
due in part to the volume gains in specialty and generic drugs. According to
EvaluatePharma (e.g. see fig.1), Worldwide prescription drug sales is projected to reach $1,
017 billion by 2020 with 10.5 % coming from generic drugs, which are more beneficial to
distributors like MCK because generics carry wider margins than branded products.
(Fig.1)

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Given the industry outlook, we strongly believe that MCK is a great buying opportunity for
the following reasons: The recent acquisition of Celesio, the agreement expansion with Rite
Aid, MCK’s tremendous accuracy in delivering its services, and the company’s specialty
business.
Celesio Acquisition
Last year, MCK agreed to purchase 76% of Celesio’s outstanding shares for $5.4 billion
dollar in cash. Celesio is a leading international wholesale and retail company and provider
of logistics and services to the pharmaceuticals and healthcare sectors worldwide,
especially in Europe. The company operates in 14 countries and serves more than 2 million
customers. Celesio’s 133 wholesale branches serve more than 65,000 pharmacies and
hospitals every day providing them over 130,000 pharmaceuticals products. The
acquisition boosted MCK’s earnings per share by more than $1 per share over the past
twelve months and the company expects savings of $275 million to $325 by the fourth year
following the combination of the pharmaceuticals giants. One the most appealing aspect to
the Celesio acquisition is the opportunity for MCK to dominate the generic drugs
distribution market, especially in Europe.
McKesson and Rite Aid Agreement
In February 2014, MCK and Rite Aid agreed to expand their distribution agreement to
include both brand and generic pharmaceuticals. MCK’s agreement with Rite Aid, one of
the leading drugstore chain in the United States, extends through 2019 and will improve
both companies’ efficiency within the sector. With this new agreement, the
“MCK/Celesio/Rite Aid” combination became the largest generic buyer in the world (Fig.
2), eclipsing the combination of Walgreens and AmerisourceBergen. This constitutes a huge
opportunity for growth for MCK, given the upcoming afflux of patent expirations of many
blockbuster drugs.
(Fig. 2)

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The following table (Fig. 3) is a list of blockbuster drugs known for their global sales, which
are set to enter the bio similar market once their patent expires in a couple years. This
represents a tremendous growth opportunity for MCK and Rite Aid, who detain the
strongest generics purchasing power.
Drug Biologic Innovator Global Sales Patent
Expiration
Avastin Bevacizumab Genentech Inc. $7B EU – 2022
US – 2019
Enbrel Etanercept Amgen Inc./
Pfizer Inc.
$8.4B EU – 2015
US -2029
Epogen/Proorit/Eprex Epoetin Alfa Amgen Inc. /
Janssen
Pharmaceutica
$3.3B EU –Expired
US – 2015
Herceptin Trastuzumab Gentech Inc. $6.8B EU – 2014
US – 2019
Humira Adalimumab Abbvie Inc. $10.7B EU – 2018
US – 2016
Lantus Insulin Glargine Sanofi $7.6B EU – 2015
US – 2015
Neulasta Pegfilgrastim Amgen Inc. $4.4B EU – 2015
US – 2015
Remicade Infliximab Johnson &
Johnson
$6.7B EU – 2015
US - 2018
Rituxan/ Mabthera rituximab Roche $7.7B EU – Expire
US -2018
(Fig. 3)

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McKesson Accuracy
Nowadays, hospitals and different healthcare providers are looking for ways to cut their
costs through efficient inventory management and supply chain operations. MCK provides
excellent distributions services from product availability, online capability, and order
accuracy. MCK is continually revising their distributions methods in order to help
independent providers and suppliers generate more savings. MCK offers a variety of
products that encompasses the entire scope of the distributions business. They offer
products such as “Central Fill SM” that allows pharmacies to manage their prescription
fulfillment efficiently and cut costs. They also offer products like Supplylogix, which
develops and delivers practical supply chain intelligence solutions for pharmacy related
businesses and services a wide group of healthcare providers nationwide. Using their six-
sigma method, MCK recorded a mind-blowing 99.9 adjusted accuracy last year, which is
key to maintaining great relationships with providers. One of the premiere examples of
how MCK helps companies save money through operations efficiency is MCK’s partnership
with The Common Wealth of Pennsylvania. After the company switched from Group
Purchasing Organization (GPO) to MCK, it realized $ 2 million in savings on its $20 million
annual pharmaceutical budget in one year.
McKesson: Leader in Specialty Health Distribution
MCK’S specialty business provides oncology-related solutions throughout the United States
through its growing network of physicians. MCK also serves pharmaceuticals and a large
number of biotech suppliers from commercialization to payment reimbursement. MCK is
virtually present in every façade in the specialty industry. MCK’s IKnowMed tool is a well
known within the industry. The software is a powerful electronic system that helps
physician keeps health records on a daily basis. It helps physicians improve the way the
administer cancer care. Also, on top of other functionalities such as tracking patient history
and e-prescribing, the device permits physicians to diagnose and stage cancer patients. As
hospitals continue to move electronic-based systems (EHR) to keep patient records for
financial incentives, MCK’s IknowMed, one of the highest rated EHR systems could generate
a lot of profits for MCK. Among other successful specialty drugs products, MCK’s InterQual
recently added a variety of expensive treatment that includes Olysio, Sovaldi and Harvoni
(Hepatitis A, B, and C). MCK also added Gilotrif and Zelboraf to their specialty drug
portfolio.

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Competitors
(Fig. 4)
With market cap exceeding $43 billion dollar, MCK is the major player within its industry.
In terms of growth, AmerisourceBergen (ABC) is the considerable player that beats
McKesson last year with 30.32% growth. However MCK is more than twice as large as ABC.
The pharmaceutical distribution industry is more about the volume of business generated.
In the future MCK has a greater upside. MCK is also trading at a lower P/E signaling a
bigger growth opportunity.
On the downside, MCK’s dividend yield (0.53%) is at the lower end when compared to its
competitors. However we believe that capital gains will make up for the lack of dividend
gains.

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SWOT Analysis
Strengths Weaknesses
 Largest ethical drug distributor
 Specialization/Domain expertise
 Customer Relationship
 Experience Management
 Merger and Acquisitions
 International Exposure
 Risks Associated with M&A (Synergies,
Absorption of new employees)
 Relatively weak presence in healthcare
IT
 Debt Ratio
Opportunities Threats
 Biogenerics, biogenerics
 Affordable Care Act
 Expansion of Medicaid
 Europe
 Potential acquisition of Rite A
 The economy
 High currency exposure
 Affordable Care Act
 Competition
 Legal proceedings
Growth Analysis
Over the past 5 years, MCK’s total revenue grew almost 60% to $ 179.045 billion. For fiscal
year 2015, the company recorded 30% in total revenue growth, while adjusted EPS grew by
29%. MCK has exceeded their FY2015 EPS guidance. The recent acquisition of Celesio has
permitted MCK to significantly increase its global presence especially in Europe, a key market
for healthcare services. Moving forward, the realization of the estimated annual synergies ($275
- $325 million) will be a major component in MCK’s growth. Additionally MCK continues to
strengthen its relationship with its suppliers and retail pharmacy partners. Last year, MCK added
500 new Health Mart stores to its network and purchased Remedy, which is Canada’s fastest-
growing independent pharmacy network. Finally, MCK continues to be a leading distributor of
specialty drugs. MCK currently disposes one of the largest networks of integrated, community-
based oncology practices in the United States. In addition to a strong oncology network, MCK is
well positioned for the potential emergence of bio similar in the United States and globally. The

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price of biologics represents about 70% of the price of the world top-10 selling drugs. Many
patents of these blockbuster drugs are set to expire. According to Thomson Reuters, over $69
billion in biologic is set to undergo patent expiration. For fiscal year 2016, MCK’s total revenue
is projected to grow an additional 7.9% to $193.080 billion. However, despite these strong
fundamentals MCK’s stock has not performed very well year-to-date (Fig. 5). I attribute this
weak performance to recent market conditions that unflavored multinationals like MCK that
have significant currency exposure. The recent decline is not reflective of MCK’s strong
fundamentals, and I expect the stock perform well for the next twelve months.
(Fig. 5)
Relative Valuation
We believe that MCK is an excellent investing opportunity, especially after the recent
selloff. The recent uncertainties about the world economy and the stronger dollar has
negatively impacted MCK’s share price. MCK’s share price dropped by more than 28% since
May. However, MCK’s fundamentals continue to remain strong as demand for healthcare
products continue to grow. MCK is currently valued at 15.6x forward twelve-month P/E,
which is considerably less than the distribution industry and the S&P 500. Given MCK’s
higher projected growth (Lower PEG ratio) compared to its competitors, we do not expect
the company to continue to trade at such a discount.

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To determine the relative 12-month price of MCK, I used an equally weighted average EPS
and EBITDA. The multiples were slightly adjusted down due to risks associated to patent
losses and recent mergers among major drug makers that can potentially put pressure on
the fees perceived by distributors like MCK. The 12-month target range for MCK is $201.79
- $249.42.
EPSx EPS Est.
(Next
4Qtrs)
Price EBITDAx EBITDA/Shr.
(Nest 4Qtrs.)
Weighted
Price
Weighted
Price
Bull 19.80 $12.95 $257.71 10.79 22.35 $241.14 $249.42
Base 18.00 $12.95 $233.10 9.76 22.35 $218.12 $225.61
Bear 16.10 $12.95 $208.50 8.73 22.35 $195.08 $201.79
Investment Thesis
MCK is a great buying opportunity after the recent market selloff. As the largest healthcare
distributor in North America, MCK’s fundamentals are as strong as they have ever been.
The recent acquisition of Celesio and MCK’s new agreement expansion with Rite aid will
accelerate the company’s growth over the next twelve months. Also, MCK’s expertise and
their relationship with providers and suppliers will allow them to steadily grow over time.
Finally, as the specialty market continues to expand, MCK is at a great place as the leader in
the distribution of specialty drugs to healthcare providers in North America. MCK also has
the largest oncology network in the U.S.
I suggest that the fund purchases 27 shares of MCK at $179/shr. The purchase will
constitute a total investment of $4, 833, or 2.9% of our portfolio value. Also, given that this
purchase will make us overweight in healthcare, I suggest that the fund sells its shares
Thermo Fisher Scientific (TMO) and realized the 40% gains from that investment.

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I expect potential capital gains ranging from to $615.33 to $ 1,901 or 12.73% to 39.33%
from this investment. Also, I expect total dividend gains ranging from $67 - $70 over the
same period.

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Resources:
McKesson.com
Bloomberg Terminal
Morningstar
Thomson Reuters
Wall Street Journal
New York Times
Bloomberg.com
Thomson

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