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mckesson Letter to Stockholders 2001
1. McKesson HBOC, Inc.
One Post Street
San Francisco, CA 94104-5296
June 13, 2001
To Our Shareholders:
We are very pleased to report the substantial progress McKesson made during the past Ñscal
year. At the beginning of the year, we established key goals in many areas of the company's
operations, which focused on restoring the strength of several important performance metrics. In the
supply management business, our primary goal was to achieve strong operating margin improvement
while continuing to grow revenues in line with the market. Our primary goals for the information
technology business were to stabilize our customer and employee bases, introduce new product
innovation and to begin, once again, to grow revenues. Our management team focused on the basics
of business execution and operational excellence and, as a result, we were successful in meeting
these important objectives.
For the year, the supply management business expanded its operating margin 14 basis points
while increasing revenues 13%. Supply management segment operating proÑt was up 20%, led by
very strong results in the pharmaceutical distribution business. A series of initiatives in this business
begun early in the year, and well-executed throughout, drove this improvement in proÑtability.
These initiatives included an organizational restructuring that created a well-focused management
team with aligned goals and incentives; increased buying leverage; improved back-oÇce operations;
greater penetration for our industry leading proprietary generic drug oÅerings and continued
leverage of our world-class pharmaceutical distribution network.
In the information technology segment, while revenues and operating proÑt for the year were
down compared to the prior year, our fourth quarter revenues of $261 million represented the Ñrst
year-over-year revenue gain in seven quarters and the second consecutive quarter of sequential
revenue growth. As a result of our change in contracting to an approach designed to deliver more
eÅective implementations for our customers, we now recognize revenues from signiÑcant software
sales over a series of quarters. While not reÖected in our revenues, software bookings were up
consistently throughout the year. The deferred software bookings helped drive a 16% increase in
backlog, a key indicator of future revenues, to approximately $1.6 billion. The breadth of our
product lines and large installed customer base have been strengthened and stabilized this past year,
and will continue to be a major asset for the company going forward.
We improved several other important measures of organizational strength in the information
technology segment during the year. The backlog of customer service calls needing our support was
down 55% and, as a result, customer satisfaction reached its highest level in two years. Employee
satisfaction exceeds industry averages in 13 of 14 key areas. During the year, we also introduced the
HorizonWP series of Web-powered products for our hospital customers, along with new versions of
several core hospital software applications.
2. In June 2000, as reported in last year's letter to shareholders, we created a focused business
unit, iMcKesson, both to develop an innovative Web-based clinical and practice management
oÅering for physicians in their oÇces and to revitalize our medical management business. However,
given changes in market conditions, it was no longer appropriate to operate iMcKesson as a separate
business. In February 2001, we announced a reorganization of this business to eliminate overlapping
development and functional areas, and apply resources to focus on more near-term opportunities in
our core hospital and health systems customer base. We have now completed the reintegration of
these resources.
We continue to believe that the fundamentals driving our business internally and externally are
positive. We are conÑdent that the strength of our markets, the positioning of our businesses and the
quality of our management team should enable us to continue to drive sustained revenue growth and
margin improvement for the company.
We remain the largest supplier of pharmaceuticals to independent pharmacies, drug chains and
hospitals in North America. The U.S. pharmaceutical market continues to experience strong
growth, forecasted to be in the range of 13 Ó 14%; and we are the only major pharmaceutical
distributor that is not distracted by a merger or restructuring. Given our broad oÅering that also
includes labor-saving automation products, pharmacy management and medical-surgical products,
and the progress we have made improving our operating processes and service, we have many
opportunities for growth.
An aging population that consumes proportionately more pharmaceuticals and a strong
development pipeline of novel therapeutics are driving increased use of pharmaceuticals. In
addition, the number of generics entering the market is expected to grow signiÑcantly in the next
several years, as is the emphasis on increased use of these products to control drug spending. We
have a large number of customers that subscribe to our proprietary generics programs, and expect
growing demand for these products.
Industry fundamentals are also very positive for our information technology segment. We have
the strongest and broadest line of information solutions, and the largest, and growing, installed base
of customers. Hospitals continue to be under pressure to reduce costs and improve quality. Our
products provide a demonstrated return on investment, and demand for these products and services
is increasing. Greater use of information technology gives these customers a clear path to improving
patient care, reducing labor and supply costs and managing around the shortage of skilled personnel.
Healthcare is an information-based business, but the IT infrastructure necessary to drive sustained
cost and quality improvement simply is not in place today. The company will beneÑt as these
investments are made by our customers to meet patient demands for improved care.
While market fundamentals, and our own operating focus, should continue to have a positive
impact on our overall Ñnancial results, the real power of our company is demonstrated most clearly
when we can draw from our entire oÅering of products and services to craft a custom, strategic
solution for a customer's long-term needs. Nowhere is that potential more apparent than in the
recent focus on medication errors. Two Institute of Medicine reports in the past 18 months
concluded that the lack of standards in how medicine is practiced and applied unfortunately leads to
many unnecessary deaths. Each year, despite the dedicated eÅorts of physicians, nurses and
pharmacists, less-than-optimal healthcare practices cause the loss of up to 100,000 lives.
We have a unique, recently introduced solution for medication safety that draws on products
from several of our businesses. This solution helps ensure that the right patient receives the right
medication at the right time.
3. You will notice in our proxy materials that we have asked our shareholders to approve a change
in the company's name to McKesson Corporation. The new name and the new graphic identity will
reÖect our uniÑed strategy for improving the performance of healthcare by delivering solutions that
integrate products and services from across our business to meet the needs of a broad range of
healthcare customers. Assuming approval from our shareholders, the McKesson name will also be
incorporated into the names of our subsidiaries and divisions.
Finally, the consolidated shareholder action against the company and other related litigation
resulting from the disclosure in April 1999 of improper accounting at HBO & Co., continues to
progress through the judicial process. A discussion of the status of these actions appears in our Ñscal
2001 Annual Report on Form 10-K, which accompanies this letter.
Looking ahead, we enter Ñscal 2002 with strong momentum and considerable opportunities for
proÑtable growth throughout the company by providing solutions to our customers' most pressing
needs. Like our customers, we are using the Internet as a tool to reduce cost and improve
performance. The more traditional annual report process is no exception. This year, we invite you to
view our Annual Report on-line at www.mckessonhboc.com for further information about the
company's product and service oÅering. Throughout the year, this site will be updated for investors
with the most-timely Ñnancial information available about the company, including copies of recent
presentations we have made to the Ñnancial community. Thank you for your continued support and
interest in McKesson. We look forward to achieving great success in the years ahead.
John H. Hammergren Alan Seelenfreund
President and Chief Executive OÇcer Chairman
Special Note Regarding Forward-looking Statements
Certain matters discussed in this letter constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Some of the forward-looking statements can be identiÑed by the use of forward-looking
words such as quot;quot;believes,'' quot;quot;expects,'' quot;quot;may,'' quot;quot;will,'' quot;quot;should,'' quot;quot;seeks,'' quot;quot;approximately,'' quot;quot;intends,'' quot;quot;plans,''
quot;quot;estimates'' or quot;quot;anticipates,'' or the negative of those words or other comparable terminology. The discussion
of Ñnancial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking
statements involve risks and uncertainties that could cause actual events to diÅer materially from those
projected. These include, but are not limited to, the factors discussed in the company's Ñscal 2001 Annual
Report on Form 10-K that accompanies this letter.