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Credit Suisse First Boston
Global Healthcare Conference
      November 17, 2004
John H. Hammergren,
                Chairman and
            Chief Executive Officer




12/3/2004                     1
Safe Harbor Clause
   Some of the information in this presentation may
   constitute forward-looking statements that are
 ...
Overview


     Who We Are


     Our View of Healthcare


     How Our Businesses Are Currently
     Performing




12/3/...
Who We Are




12/3/2004                4
McKesson’s Solutions …
  Building on Distribution Strength


                                          Solutions for
     ...
Our Business Today



                                                             McKesson
                              ...
Strong, Long-term Customer
Relationships with Market Leaders
             Vanderbilt University Medical Center




 12/3/2...
FY05 Consolidated Financial
               Results
($ and shares in millions,
                                          Q2...
Our View of Healthcare




12/3/2004                    9
Trends Driving Healthcare
                   Growth
                   Reduce medical errors                              ...
Improved U.S. Healthcare
                    by 2010
            Informed clinical
             Informed clinical
        ...
McKesson’s Strategy
 To bring together clinical knowledge, process
   expertise, technology, and the resources of
     a F...
How Our Businesses
            Are Currently Performing




12/3/2004                     13
Pharmaceutical Solutions




12/3/2004                    14
FY05 Financial Results –
            Pharmaceutical Solutions
     ($ in millions)                                  Q2    ...
Pharmaceutical Solutions
                 Q2 Highlights
     Above market U.S. revenue growth of 20%
            First ful...
U.S. Pharmaceutical Distribution
         Environment
     35-year evolution in manufacturer economics
            Histori...
Value of Drug Distribution
Industry
  Booz-Allen study shows $10.5 B in added annual
  expense to replicate distributor ne...
McKesson Pharmaceutical
             Product Flow

                   McK         Customer
                   RDC         ...
Progress with Manufacturers
 Collaborative strategy designed to deliver more
 predictable core distribution fees based on ...
Progress with Manufacturers
  PHASE 1:        APPROPRIATE COMPENSATION
  August 2003 to August 2004

                     ...
Pharmaceutical Distribution
          Margin Drivers
            +                                   -
     2% Cash
     2...
Pharmaceutical Solutions
                Operating Margin
Over the past 15 years, we have experienced
significant changes ...
Improve Existing Customer
                   Profitability
 Improving compliance and efficiency across
 customer base
    ...
Medical-Surgical Solutions




12/3/2004                      25
FY05 Financial Results –
            Medical-Surgical Solutions
  ($ in millions)                    Q2                   ...
Medical-Surgical Solutions
                 Q2 Highlights
 Continued strong growth from alternate site
 customers
 Quarter...
McKesson Provider
              Technologies




12/3/2004                 28
FY05 Financial Results –
               Provider Technologies
($ in millions)                            Q2               ...
Provider Technologies
                Q2 Highlights
     Software bookings up strongly
     Revenues reflect continued str...
Summary




12/3/2004             31
What McKesson Represents
Core pharmaceutical business positioned for
sustained growth with a strategy in place to address
...
Outlook

FY05 expectation: $2.00 to $2.20 per share
       Pharmaceutical Solutions earnings continue to
       depend on ...
12/3/2004   34
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Credit Suisse First Boston Healthcare Conference

  1. 1. Credit Suisse First Boston Global Healthcare Conference November 17, 2004
  2. 2. John H. Hammergren, Chairman and Chief Executive Officer 12/3/2004 1
  3. 3. Safe Harbor Clause Some of the information in this presentation may constitute forward-looking statements that are subject to various uncertainties. These uncertainties could cause actual results to differ materially from those projected or implied. The risk factors associated with those uncertainties are described in the Company’s reports and exhibits filed with the Securities and Exchange Commission. Financial information is presented here in summary form. Full details are provided in the Company’s most recent 10-Q report. All of this information is available at www.mckesson.com. 12/3/2004 2
  4. 4. Overview Who We Are Our View of Healthcare How Our Businesses Are Currently Performing 12/3/2004 3
  5. 5. Who We Are 12/3/2004 4
  6. 6. McKesson’s Solutions … Building on Distribution Strength Solutions for medication safety Pharmaceutical & medical- surgical distribution to all sites Clinical, financial & resource management for hospitals & IDNs Inpatient automation Specialty Retail pharmacy pharmaceuticals automation Disease management Drug cards for seniors Pharmaceutical 12/3/2004 5 repackaging
  7. 7. Our Business Today McKesson McKesson McKesson Provider Technologies Medical- Medical-Surgical Pharmaceutical 63% of health systems #1 in primary care #1 in U.S., Canada, and Mexico 51% of hospitals with #1 in extended 200+ beds care Large Rx repackaging Leader in clinical, Total supply Leading generics provider revenue cycle, solution in acute #1 in retail pharmacy and resource care automation management solutions Private label Specialty distribution & More “Best in KLAS” product offerings patient services for products than any Rapid growth in manufacturers other vendor physician office #1 in medical management #1 in robotic hospital pharmaceuticals software and services for pharmacy dispensing and equipment payors #1 in bedside scanning #1 in disease management for Medicaid agencies 12/3/2004 6
  8. 8. Strong, Long-term Customer Relationships with Market Leaders Vanderbilt University Medical Center 12/3/2004 7
  9. 9. FY05 Consolidated Financial Results ($ and shares in millions, Q2 Six Months except EPS) FY04 FY05 FY04 FY05 Revenues $ 16,810 $ 19,934 19% $ 33,334 $ 39,121 17% Gross Profit 812 735 -9% 1,598 1,587 -1% Gross Profit Margin 4.83% 3.69% (114) bp 4.79% 4.06% (73) bp Operating Income 227 129 -43% 479 390 -19% Operating Income Margin 1.35% 0.65% (70) bp 1.44% 1.00% (44) bp Net Income 157 86 -45% 312 250 -20% Diluted EPS $ 0.53 $ 0.29 -45% $ 1.05 $ 0.84 -20% Weighted Average Shares 300 300 299 300 12/3/2004 8
  10. 10. Our View of Healthcare 12/3/2004 9
  11. 11. Trends Driving Healthcare Growth Reduce medical errors Payors taking on more risk Adopt clinical protocols/ Limitations on use of Increased evidence-based medicine managed care tools Focus on pressure on Employer pressures on quality of care payors double-digit premium increases Chronic disease Automation to overcome Continued management labor shortages improvements in Outpatient and Case management Electronic claims and chronic disease operational and Manage high-cost diseases eligibility management administrative in small populations Online prescription and lab efficiency transmissions Streamlined pre-authorization Biotech pipeline expansion Unhappy consumers New drug delivery Better informed consumers Continued use mechanisms of new drugs, Increased Rapid growth in generics but increased consumerism Regulatory pressures on pricing scrutiny pricing 12/3/2004 10
  12. 12. Improved U.S. Healthcare by 2010 Informed clinical Informed clinical practice practice CULTURE CULTURE Interconnection Interconnection CHANGE CHANGE Improved safety Improved safety in the in the and efficiency and efficiency delivery of delivery of Personalized care healthcare healthcare Personalized care Population health Population health initiatives initiatives 12/3/2004 11
  13. 13. McKesson’s Strategy To bring together clinical knowledge, process expertise, technology, and the resources of a Fortune 16 company to fundamentally change the cost and quality of healthcare. Create long-term Introduce relationships based Sell McKesson’s innovations that on custom solutions comprehensive address emerging that deliver offering healthcare ROI & quality challenges 12/3/2004 12
  14. 14. How Our Businesses Are Currently Performing 12/3/2004 13
  15. 15. Pharmaceutical Solutions 12/3/2004 14
  16. 16. FY05 Financial Results – Pharmaceutical Solutions ($ in millions) Q2 Six M onths FY04 FY05 FY04 FY05 Revenues U.S. direct distribution & services $ 9,655 $ 11,638 21% $ 18,990 $ 22,649 19% U.S. sales to customers' warehouses 5,058 6,021 19% 10,222 11,938 17% Subtotal 14,713 17,659 20% 29,212 34,587 18% Canada distribution & services 1,070 1,258 18% 2,114 2,510 19% Total Pharmaceutical Solutions $ 15,783 $ 18,917 20% $ 31,326 $ 37,097 18% Gross Profit 509 432 -15% 1,027 992 -3% Gross Profit Margin 3.22% 2.28% (94) bp 3.28% 2.67% (61) bp Operating Expense 294 287 -2% 553 562 2% Operating Profit 222 151 -32% 487 441 -9% Operating Profit Margin 1.40% 0.80% (60) bp 1.55% 1.19% (36) bp 12/3/2004 15
  17. 17. Pharmaceutical Solutions Q2 Highlights Above market U.S. revenue growth of 20% First full quarter of VA business with annualized revenues in excess of $3.5B, better than expected profitability AdvancePCS volume of Caremark implemented in August with annualized revenues of $2B Continued strong growth in Canada of 18% Fewer than expected price increases significantly reduces operating profit 12/3/2004 16
  18. 18. U.S. Pharmaceutical Distribution Environment 35-year evolution in manufacturer economics Historical economics evolved to dependence on pharmaceutical price inflation for major source of compensation Changes underway in healthcare may impact pharmaceutical pricing Customer pricing model established on inflation- based profit opportunities 12/3/2004 17
  19. 19. Value of Drug Distribution Industry Booz-Allen study shows $10.5 B in added annual expense to replicate distributor network/service McKesson Next day delivery to 23,000 pharmacies with 99.1% fill rate 45,000 SKUs 129,000 invoices per day 150,000 contracts involving $20 B in annual chargebacks >$400 M additional invested over the past 4 years 12/3/2004 18
  20. 20. McKesson Pharmaceutical Product Flow McK Customer RDC Warehouse Manufacturer Customer Pharmacies McK DCs 12/3/2004 19
  21. 21. Progress with Manufacturers Collaborative strategy designed to deliver more predictable core distribution fees based on value provided Phase 1: Focus on securing an appropriate level of compensation with less product sourcing Compensation from largest manufacturers still tied to the timing and magnitude of price increases Phase 2: Focus on maintaining appropriate compensation while gaining predictability by reducing dependence on price inflation Achieve significant progress by January 1 and substantially complete the process by March 31, 2005 fiscal year end 12/3/2004 20
  22. 22. Progress with Manufacturers PHASE 1: APPROPRIATE COMPENSATION August 2003 to August 2004 % Complete Result New IMAs and CDAs reflect value of service provided 80% All companies Compensation still tied to price inflation Largest companies PHASE 2: PREDICTABLE COMPENSATION September 2004 to March 2005 Result % Complete New agreements based on FFS All companies and/or guarantees >80% Largest companies 25% About a dozen remaining 12/3/2004 21
  23. 23. Pharmaceutical Distribution Margin Drivers + - 2% Cash 2% Cash Discount Discount Sell Sell Margin has Margin Margin fluctuated very little Generics over the Generics past 35 years Operating Operating Expenses Expenses Buy Buy Profit* Profit* * Buy profit includes spe culative buying, IMA s, FFS 12/3/2004 22
  24. 24. Pharmaceutical Solutions Operating Margin Over the past 15 years, we have experienced significant changes in the marketplace, price increases ranging between 1.7% and 8.5%, yet operating margin has fluctuated little between a narrow range European distributors that face entirely different market factors have similar operating margins Operating margin for direct store sales has been generally between 2% and 2.5% = 1.5% to 2% including warehouse sales 12/3/2004 23
  25. 25. Improve Existing Customer Profitability Improving compliance and efficiency across customer base Focus on securing prime vendor relationships exclusively Enforce contract terms (e.g., generic compliance) Charge for additional services (e.g. emergency shipments, minimum order size, etc.) 12/3/2004 24
  26. 26. Medical-Surgical Solutions 12/3/2004 25
  27. 27. FY05 Financial Results – Medical-Surgical Solutions ($ in millions) Q2 Six Months FY04 FY05 FY04 FY05 Revenues $ 716 $ 714 $ 1,426 $ 1,421 -- -- Gross Profit 151 162 297 321 8% 7% Gross Profit Margin 21.13% 22.69% 156 bp 20.85% 22.57% 172 bp Operating Profit 25 18 -31% 51 46 -10% Operating Profit Margin 3.53% 2.45% (108) bp 3.58% 3.24% (34) bp 12/3/2004 26
  28. 28. Medical-Surgical Solutions Q2 Highlights Continued strong growth from alternate site customers Quarter’s results impacted primarily by increased litigation reserve New 3-year, $150 million agreement with Adventist Health includes Optyx state-of-the-art analytical service 12/3/2004 27
  29. 29. McKesson Provider Technologies 12/3/2004 28
  30. 30. FY05 Financial Results – Provider Technologies ($ in millions) Q2 Six Months FY04 FY05 FY04 FY05 Revenues Software & software systems $ 67 $ 50 -26% $ 113 $ 101 -11% Services 217 228 421 451 5% 7% Hardware 27 26 -7% 48 52 9% Total Provider Technologies $ 311 $ 304 -2% $ 582 $ 604 4% Gross Profit 152 141 -7% 274 274 -- Gross Profit Margin 48.65% 46.48% (217) bp 47.04% 45.42% (162) bp Operating Profit 37 19 -48% 42 34 -20% Operating Profit Margin 11.95% 6.32% (563) bp 7.20% 5.55% (165) bp 12/3/2004 29
  31. 31. Provider Technologies Q2 Highlights Software bookings up strongly Revenues reflect continued strong demand for clinical solutions but complexity of installations Percentage of Completion (POC) is increasing as a percent of revenue Demand for revenue cycle and resource management solutions remains flat Government focus on HIT may drive future growth opportunities 12/3/2004 30
  32. 32. Summary 12/3/2004 31
  33. 33. What McKesson Represents Core pharmaceutical business positioned for sustained growth with a strategy in place to address industry evolution Additional businesses poised to take advantage of new and expanding opportunities in healthcare Track record of financial performance Consistent annual EPS growth despite challenges Increasing cash flow Strong balance sheet provides financial flexibility Commitment to financial transparency 12/3/2004 32
  34. 34. Outlook FY05 expectation: $2.00 to $2.20 per share Pharmaceutical Solutions earnings continue to depend on price increases through fiscal year end Expectation assumes that volume-weighted U.S. pharmaceutical price increases in Q3 and Q4 will be within the historical range, and that the magnitude of price increases will be comparable to the recent past Create Value for Suppliers, Customers and Shareholders 12/3/2004 33
  35. 35. 12/3/2004 34

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