June 14, 2002
To Our Stockholders:
I am very pleased to report that McKesson delivered excellent performance on all
key financial measurements in its fiscal year 2002. Here are the highlights for the
Revenues excluding sales to customers' warehouses were up 18%.
Total revenues exceeded $50 billion.
Pro forma operating profit was up 39%.
Pro forma earnings per fully diluted share increased 51%.
Return on committed capital increased from 18.8% to 21.8%.
Return on equity increased from 7.8% to 11.9%.
McKesson has now reported two full years of solidly improving financial
performance, including five consecutive quarters of pro forma earnings per share
growth above 40%, the last two above 50%.
Our improving results are being driven by above-market revenue growth in our
U.S. pharmaceutical distribution business, new product introductions in our
Information Solutions segment, increased demand for our automation products
that reduce medication errors, operating improvements that drive margin
expansion and disciplined asset management. Our continued focus on these
strategies going forward should deliver sustained improvement in financial results.
McKesson is well positioned to maintain its financial momentum. The demand for
healthcare is increasing, driven by the demographics of the U.S. population. This
will fuel increased consumption of our pharmaceutical and medical-surgical
products. At the same time, the demands on healthcare providers have never been
greater. The government, employers and consumers are demanding both
improvements in the quality of healthcare and lower costs. In the past, bluntly
applied expense controls and economies of scale have been used to slow cost
increases. We believe that these macroeconomic approaches have run their course.
Healthcare providers must now turn to microeconomic strategies that reduce
variability by applying best-demonstrated practices to eliminate the errors
associated with the human side of healthcare. This should drive increased
investments in information systems and automation solutions from McKesson to
improve quality and streamline workflow.
We have grown our pharmaceutical distribution segment faster than the market by
demonstrating that we can reduce costs and working capital investments for our
customers. We improve supply chain management through the use of technologies
that enable McKesson to deliver products to our customers at the point of use, as
opposed to simply sitting on the shelves. As a result, we have been able to gain new
domestic pharmaceutical business that was previously shipped direct or outside
the distribution channel. Our Canadian pharmaceutical distribution revenues also
grew faster than the market.
We have balanced our strong pharmaceutical revenue growth with significant
operating margin rate expansion. For the past two years, operating margin
improvement has been delivered by product sourcing opportunities, improvements
in operations, a broader generics offering and margin expansion in our Canadian
distribution business. It is our goal to increase the Pharmaceutical Solutions
operating margin again in the coming year, driven by further improvements in
these areas and profit contributions from associated products and services.
In September 2001, we implemented a major restructuring of our medical-surgical
distribution network to significantly reduce the number of distribution centers.
When successfully completed, this restructuring will have a positive impact on the
cost structure of that business. We are also implementing a new, business-wide
information system designed to enable greater operating efficiencies and improve
Beginning with the company's 2002 Annual Report on Form 10-K, we are
expanding our segment disclosure to provide investors with additional information
about our pharmaceutical and medical-surgical distribution businesses. This
additional information should enable investors to better understand the dynamics
of the company's financial performance and in particular to fully appreciate the
excellent results we have achieved in the Pharmaceutical Solutions segment over
the past two years.
While our near-term supply management strategy is focused on executing the
opportunities that exist for growth and profitability in our pharmaceutical and
medical-surgical distribution segments, during the past year we took actions that,
if successful, should drive additional growth over the longer term. For example,
with our acquisition of Vita-Rx, we have assembled a set of capabilities tailored to
the needs of pharmaceutical and biotechnology manufacturers and payors for
Specialty Pharmaceutical distribution. Vita-Rx complements our patient support
programs, our disease management offering and our extensive distribution
capabilities. This is a growth area of the market and we believe we will be
competitive for new business opportunities.
Our Information Solutions segment continues its well-designed plan to return to
market leadership. Operating profit increased significantly the past fiscal year by
streamlining our cost structure so that we could continue to invest in areas to drive
future growth: the continued evolution of our product lines, expansion of our sales
force, and upgrading our customer service capabilities. These strategies have
dramatically improved product quality and customer satisfaction while driving a
37% increase in software bookings.
We believe that we are at the start of an extended period of strong demand for
clinical software to drive improved patient care outcomes and healthcare quality in
hospitals and health networks. In July 2001, we introduced our Horizon Clinicals
offering to address the need of hospital and health network customers for
information systems that improve the quality of care delivery while reducing
healthcare costs. A key component of the Horizon Clinicals offering is Horizon
Expert Orders, which provides physicians with the information and decision
support tools they require at the point of care, to optimize every patient encounter.
When combined with our automation technologies, McKesson provides a
comprehensive solution to medication errors from the point that the physician
decides and writes the prescription to the point that the medication is delivered to
In May 2002, we announced a definitive agreement to acquire A.L.I. Technologies
Inc., an innovative medical imaging company. Our ability to rapidly bring digitized
medical images to physicians at our large installed base of customers should
accelerate our market momentum. Recent surveys indicate that nearly half of
McKesson's near-term clinical prospects are actively looking for a new medical
image management solution. As a result, we see a significant opportunity to grow
our share of the imaging market that is predicted by industry analysts to reach $1
billion annually by 2005. We expect to complete this acquisition in July and begin
immediately to incorporate its capabilities into our Horizon Clinicals offering and
our sales strategies.
Based on the market's response to our Horizon Clinicals introduction and our
recent strong software bookings, we believe Information Solutions has the potential
to deliver significant upside to the company's financial results over the next several
While our primary focus is on optimizing our significant business and financial
opportunities, we also continue to manage the consolidated stockholder action
against the company and other related litigation resulting from the disclosure of
improper accounting at HBO & Co., which we acquired in January 1999.
Recognizing the keen interest that our stockholders have in these issues as they
continue to progress through the judicial process, please see our enclosed fiscal
2002 Annual Report on Form 10-K for a complete discussion of the status of these
Before closing, on behalf of the company and its Board of Directors, I want to
recognize the contributions of several retiring board members. Alfred C. Eckert III
and Gerald E. Mayo, each of whom joined the board in 1999, have provided sound
guidance and leadership during the company's recent financial and strategic
I also want to pay special tribute to Alan Seelenfreund, who made many
substantial contributions to the company during a 26-year career that included
serving as chief executive officer from 1989 to 1997 and as chairman for most of the
past 13 years. During his tenure as chairman, he led a sharpening of McKesson's
focus in healthcare, providing strong leadership and strategic direction during a
period of great change, challenge and opportunity for McKesson.
McKesson's success depends ultimately on the loyalty and commitment of our
customers and employees. We are using a series of Business Scorecards across the
company to measure annual financial, customer, employee and operating process
performance compared to pre-set objectives. Hundreds of employees trained in Six
Sigma methodologies are applying them to drive process improvements that lower
our costs while increasing quality for our customers. Across McKesson, we adhere
to a set of principles to make decisions and guide our behavior, which we call quot;quot;I
CARE'': Integrity, Customer-centered, Accountability, Respect and Excellence.
Over the past two years, as a result of our focus on product quality and
responsiveness, customer satisfaction has increased significantly, as measured by a
number of independent, third party measures. Employee satisfaction has also
increased. Even more importantly, employee turnover has been reduced and is now
substantially lower than industry averages. I want to thank our customers for their
continued commitment to McKesson and our employees for their hard work and
sustained contributions to the company.
At McKesson, we have a clear vision of a New World for Healthcare. In this world:
Physicians are free to practice medicine aided by the best available evidence.
Patients are well-informed about healthcare quality, and errors are reduced.
New pharmaceuticals, devices and medical knowledge improve quality of life for
all of us.
It's a world where healthcare quality is much higher and healthcare costs are much
more affordable. It is our goal to help our healthcare customers become a part of
that new world.
In conclusion, the external and internal fundamentals remain excellent in both
healthcare distribution and healthcare information technology. Our
Pharmaceutical Solutions segment provides stockholders with a solid foundation
for growth over the next several years. Our Information Solutions segment
provides the opportunity for stockholders to participate in a rapidly growing and
higher margin segment of the healthcare market. McKesson has a well-designed
offering to help improve quality and reduce costs, which should deliver great value
to customers, employees and stockholders. We are in the right place at the right
time in healthcare, with a complementary but diversified portfolio of healthcare
businesses that should deliver sustained excellent financial performance. I'm very
pleased with the results we have achieved over the past two fiscal years, and look
forward to continued strong performance in fiscal 2003.