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Executive Summary

McKesson's business with independent and small chain drug stores enrolled in the whslr.'s merchandising programs generated sales of $338 mil., or nearly 12% of McKesson Drug's fiscal 1985 revenue, the company said in its just-released annual report for FY 1985 ended March 31. "The combined purchases of Valu-Rite and the Northwest Independent Druggists League from McKesson Drug rose 16% to $338 mil. in fiscal 1985," the annual report states. "The gain reflects in part a 30% rise in the sales of Valu-Rite's private-label health and beauty aids, boosted by 14 new product introductions." The increase in sales from Valu-Rite stores occurred in spite of little or no gain during fiscal 1985 in Valu-Rite's 1,600 store membership, the annual report indicates. Using the 1,600 store figure, the retail merchandising programs generate an average of approximately $200,000 in sales to McKesson per enrollee. "Independents now account for 53% of McKesson's whsle. drug revenues," the annual report notes, or a little over $1 bil. of FY 1985 sales. Chains and mass merchandisers accounted for 33% of McKesson Drug sales in FY 1985, McKesson added, or just under $700 mil. McKesson's drug whsle. business to hospitals continues to be one of its fastest growing segments. According to the annual report, "McKesson is the largest distributor of drugs to hospitals, with $275 mil. in sales in fiscal 1985, a 25% increase." Hospitals accounted for 14% of McKesson's whsle. drug sales. McKesson Drug And Health Care Sales Approach $3 Bil. In Fiscal 1985; Acquisitions Will Add Another $1 Bil. During the past fiscal year, the annual report notes, McKesson introduced a program "designed to keep hospital pharmacists constantly updated on the status of their orders so that alternate sources of supply can be contacted if necessary." The report adds that the whslr. plans to expand its electronic order-entry service for medical/surgical products, offered by McKesson's Gentec subsidiary, beyond its current 16 state region in fiscal 1986. McKesson noted that Gentec "is beginning to penetrate the hospital market for high volume medical/surgical disposables." McKesson has also emphasized its computer services as part of its value-added package to its retail drug customers. The annual report notes that the "vast majority of McKesson Drug's 15,500 customers use Economost or one of its other automated order-entry systems." The whslr. recently noted that 99.3% of its orders are now done electronically. In addition, McKesson noted that its 3PM computer system subsidiary will introduce during the current fiscal year "a point-of-sale software package for pharmacy customers that will link their cash registers to in-store computers." Overall, McKesson's Drug & Health Care Group posted an 18.2% sales increase in fiscal 1985 to over $2.9 bil. Operating profit for the business group climbed 16.9% to $70.2 mil. This performance does not reflect the impact of three acquisitions announced since April, including Spectro, S-P Drug, and the rack jobber, Mass Merchandisers, which combined should add another $1 bil. in sales. In order to finance the cash purchase price of Spectro and S-P, which totals over $250 mil., and to support future acquisitions, the annual report shows that McKesson negotiated credit lines totaling $150 mil. effective May 1, 1985, on top of the $180 mil. line of credit already available to the whslr. Mass Merchandisers is being acquired through a stock swap subject to approval of Mass Merchandiser shareholders. McKesson's cash and short term investment position held steady in FY 1985 at $43 mil.

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