8/12/2019 Mckesson V0 3

1/15

MckessonHistory

Started in 1833by John McKesson and Charles Olcott ( importing andwholesaling chemicals and therapeutic drugs in small shop new your city

In 1855McKesson entered into manufacturing business, producing pills andfluid extracts

After fifty years the company added several subsidiary wholesale

businesses and become a leading pharmaceutical products distributor

In 1960 McKesson merged with san Francisco, California based dairycompany, subsequently expanding its production and distributionportfolio to include hospital and lab supplies and equipment, fresh dairyproducts and processed water and alcoholic beverages.

In 1980sand 1990s, McKesson focused on health care

Its deepend engagement with customers by adding IT and various value -added offerings (Health mart)

8/12/2019 Mckesson V0 3

2/15

About Mckesson

Health care equipment and medical-surgical products Software and connectivity solutions

Drug distribution

America's 15th largest company(Sandwiched between Citi group and

Verizon on the fortune 500)

178 year old McKesson corporation was a san Francisco, California- based provider of

Mckesson have more than 36000 employees and 112 USD billion in revenue

Mckesson supplied products and services for 50% of all hospitals,

40% of pharmacies and 90 % of Payors in the U.S

8/12/2019 Mckesson V0 3

3/15

John Hammergren

Bachelor's degree in business administration & MBA from Xavier University in Cincinnati.

1996 -Joined McKesson

1999- Director and Co- CEO2001- president and CEO2002- chairman of the board

Mckesson's revenues more than doubled under Hammergren, from $ 42Billion int 201 to $112billion in 2011

Stockprice got increased

In 2006 purchased -Per Se Technologies (Relay health).

From 2006 to 2011 Mckesson Executed 30 acquisition for a total of $ 5.7 billion.

I care Six Sigma

Hammergren Initiatives

$ 100 million internal savingsImproving customer sevice99.9% accuracy rate in customer order fulfilment

8/12/2019 Mckesson V0 3

4/15

8/12/2019 Mckesson V0 3

5/15

Operating Segments

l

Segment Offerings

Distribution Solutions Technology Solutions

Wholesaling and other services (e.g.Consulting) to manufacturers ofPharmaceuticals and medical-surgicalsupplies, and consumer health care products.

This segment provided software, automationservices(e.g inventory management and drugdispensing systems), and consulting to hospitals,physician offices, imaging centers, home healthcare agencies, and payors.

Specialty Care

USON- specialty care business provided productsand services used by medical specialists to carefor patients with complex and costly diseases(e.g, cancer, HIV, osteoporosis, rheumatoidarthritis etc..)

Relay Health

Many of McKesson's IT products were offered throughRelay Health, a unity that included electronic prescribingby physicians, point-of-service resolution of pharmacyclaims by Payors.

Medical-surgical

Sold more than 150000 national brand andMcKesson-brand products to physician practices

Each month 40000 to 50000 physician practicespurchased medical- surgical products fromMcKesson.

employed 550 sales people focused on small

independent practices, large physician groups,integrated delivery network

HITECH

Part of the American Recovery and reinvestment act of2009,HITECH provided financial incentives forphysicians and hospitals to adopt EHRs.

8/12/2019 Mckesson V0 3

6/15

Pressure in U.S Health CareEnvironment

U.S Health care spending, which consistently grew much faster than inflation, wasprojected to reach $4.3 trillion or 20.3 % GDP by 2018

Citizens 65 and over- a group whose health care costs were three to five times that ofpeople under Age 65

cost of cancer was projected to rise to 39% in the U.S from 2010 to 2020, reaching upto $ 173 billion

Patient Protection and Affordable Care Act (PPACA) targeted three pain points in the U.Shealth care system: Cost, Quality and insurance coverage

Pressures on Independent Physicians

Mandates for individuals to obtain health insuranceFirms with 50-plus workers to sponsor employee coverage

The law cut Medicare and Medicaid reimbursement to physicians, hospitals, and drugcompanies

The new payment model provisions of the bill(bundling,ACO) threatened Independet

physicians.

8/12/2019 Mckesson V0 3

7/15

Contrast to Fee for service payments(insurers paid providers a fee for each service)

Insurers paid providers a flat payment to manage all care required for certain healthneeds of a group of health plan enrollees

Payments were usually calculated on per-Member-Per Month Basis(PMPM) andincluded a profit margin for the provider

Accountable Care Organizations (ACOs)

Patient- Centered Medical homes (PCMH)

Bundled payments

New payment and Delivery Models

A Physician-led team of clinicians was responsible for coordinating all health care for a poolof patients covered under a particular Payor

Aimed to lower costs and improve quality through specific standards of care provision and

data collection

IN this model a health care delivery system was accountable for the quality and the totalcost of care for a defined, local patient population.

Patient established a budget, calculated based on historical cost

8/12/2019 Mckesson V0 3

8/15

Fee-for-Service BusinessModel In the past McKesson and the other pharmaceuticaldistributors, Cardinal Health and AmerisourceBergen,

operated on a buy/hold business model under which acompany would purchase drugs from manufacturers in largequantities based on what their own pricing models predictedwould happen to the value of the drugs. Then McKessonwould sell the drugs to its customers for--hopefully--a higherprice than that paid for the drugs.

However, McKesson and its competitors have switched theirbusiness model to a fee-for-service (FFS) model. Distributorsnow have arrangements with manufacturers that provide feesand/or discounts to distributors for meeting certain levels andrequirements. Although the shift to FFS has cut down on theinfluence of drug price inflation on McKessons margins, priceinflation still accounts for approximately 20-25% ofMcKessons profits.

8/12/2019 Mckesson V0 3

9/15

Customer Partnership Models:Health Mart andUSON

McKesson bought FoxMeyer Drug company in 1996, along with its subsidiary health mart

(with 800 Pharmacy Franchisees)

Acquisition build on McKesson's existing independent pharmacy franchise, value-Rite, and itsIT suite for prescription and payment management

Around 2005, McKesson refocused on the independent pharmacy sector and decided toinvest in Health mart as its flagship franchise

In 2010, overall U.S. spending increased 21.7% on unbranded generics and 4.5% on branded

generics, while spending on branded drugs declined 0.7%

In 2011, the Health Mart network included more than 2700 pharmacies

USON was formed through the 1999 merger of two cancer care management companies

(Physician Reliance Network and American Oncology Resources).

USON operated in two main businesses: Specialty drug distribution and acomprehensive strategic alliance (CSA)

USON's 540 affiliated sites, including more than 100 radiation treatment facilities and986 physicians, treated over 850000 cancer patients across the US

8/12/2019 Mckesson V0 3

10/15

8/12/2019 Mckesson V0 3

11/15

Cardinal Health: Cardinal Health is McKesson's top competitor, in terms of revenue as well as

services offered. Cardinal Health is slightly more diversified than McKessonas only approximately 86% of its revenue is generated from the distributionof drugs.

The rest of Cardinal Health's revenue is derived from the distribution ofmedical and surgical supplies to hospitals and other healthcare facilities(approximately 8% of revenue), providing software and IT services (about

5%) and the production of medical products (approximately 1%). CardinalHealth lags McKesson in terms of revenue, but is more profitable thanMcKesson because of its more high-margin product and service mix.

Mckesson Competitors

AmerisourceBergen

The great majority of AmerisourceBergen's revenue (approximately 97%) comes

from the packaging and distribution of drugs and related services. The remaining3% of revenue is derived from the distribution of healthcare products and servicesto alternate-site healthcare facilities and long-term care patients.

AmerisourceBergen is similar to McKesson as it is so focused on the distributionof drugs. However AmerisourceBergen is not involved in the healthcare ITmarket, which may give McKesson an advantage as the healthcare IT market

grows and possibly becomes more consolidated.

8/12/2019 Mckesson V0 3

12/15

Mckesson's Options

Primary care physicians monitored patients overall health and diagnosed and treated common

and chronic illnesses.

Primary Care

Rheumatologists were internists (Physicians focused on adult diseases) and pediatricians(Focused on childhood diseases)

Gastroenterologists were internists specialized in the diagnosis and treatment of diseases ofthe gastrointestinal tract and liver.

The orthopedic medical specialty diagnosed and treated injuries and conditions of themusculoskeletal system (Bones, joints, ligaments, Tendons, muscles, and nerves).

Specialized in the diagnosis and treatment of diseases of the joints, muscles, and bones,

including osteoarthritis and rheumatologists

Orthopedics

Gastroenterology

Rheumatology

8/12/2019 Mckesson V0 3

13/15

SWOT

Strength

Mckesson is a long established company ,thishas a reputation over a period of 175 years-Strong Market Position.

Leading provider of pharmaceuticalDistribution and dealership with largecompanies.-Improved Profitability

Mckesson provides services and products tohealth care providers and payers-Value addedServices

It provides its services to more than 40000 USpharmacy stores, Large customer base isdefinitely a strength.

Mckesson employees information

technology systems ,that requires decimatepaper prescription and patient records.

Weakness

Being a company in health care and Medicalbusiness, it faces several legal tangles andrestrictions related to patients.

Mckesson is the lack of proper healthcareinformation grouping .

Since there is a growing demand for effectiveproducts and services, McKesson is notstrong enough to deliver.

Opportunities

Acquisitions

partnership with healthcare service providers.

Threats

Intense competition may erode profit.

Cost-containment measures.

8/12/2019 Mckesson V0 3

14/15

2010 2009

High Low High Low

First quarter $ 45.27 $ 33.13 $ 58.78 $ 51.96

Secondquarter

$ 59.95 $ 42.61 $ 58.85 $ 52.32

Third quarter $ 64.98 $ 55.82 $ 52.55 $ 28.6

Fourthquarter

$ 66.98 $ 57.23 $ 45.8 $ 34.77

Stocks Prices in 2009-2010 Fiscal year

8/12/2019 Mckesson V0 3

15/15

Thank you

Sriram ParthasarathyNeeraj GuptaChadrasekar