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McKESSON HOSPITAL SALES ARE ABOUT 18% OF COMPANY's WHOLESALE DRUG BUSINESS

Executive Summary

Hospital sales now account for 18% of McKesson's drug distribution business, up from 9% as recently as fiscal 1984, McKesson Executive Vice President-Operations Rex Malson told securities analysts in New York City Nov. 10. "The hospital business has now stabilized at about 18% of revenues," Malson noted, which is down slightly as a percentage of McKesson revenues in fiscal 1987 and 1988. "Last year we made a conscientious effort to increase the cost of goods on several group contracts while remaining competitive," Malson continued. "Through our efforts with suppliers, we have reduced the charge-back float significantly." McKesson's sales of hospital supplies (as opposed to drugs to the hospital market) through the firm's McKesson Medical division grew 37% in fiscal 1988 (ended June 30), Malson pointed out. "This increase was fueled by positive developments, which included the addition of major new suppliers, the three-fold expansion of our business with Humana Corporation and new contracts with Amerinet and the Iroquois Hospital Consortium," Malson explained. "We expect fiscal 1989 hospital supply revenue to increase another 35 to 40%." McKesson Chairman Thomas Field reported that price increases made up less than half of McKesson's drug distribution gains through the Sept. 30 first half. Drug business revenues were up 11% to $ 2.76 bil. Price increases accounted for 5% of the gain. As a current barometer of drug industry price trends, McKesson data may be better than the government's Bureau of Labor Statistics. If so, that April 1 through Sept. 30 figure still appears to be holding at a relatively high level. Reporting on efficiency gains in McKesson's core drug distribution business, Malson reported that the wholesaler has recently opened a new "mega-distribution" center in Tampa and will be completing construction of three new distribution centers in Salt Lake City, Oklahoma City and Cincinnati by early 1990. "These facilities will average 165,000 square feet -- double the size of the distribution centers they are replacing," Malson said. McKesson has been actively consolidating and streamlining distribution centers over the past 10-12 years, and has reduced the number of distribution centers from 79 in 1976 to 50 in 1988. "We recently merged six distribution centers into three," the company exec said, "to strengthen our ability to service the customer, provide a better inventory selection and increase the profitability of the servicing distribution center." To illustrate the efficiencies of the mega-distribution centers, Malson drew a comparison between the distribution centers of the 1960's and today. "In the 1960's, our average distribution center was about 60,000 ]square[ feet doing $ 10 mil. a year and carrying 15,000 SKU's." This year, for example, the 240,000 square foot Sacramento mega-center that opened in 1983 "will do over $ 270 mil. and carries 25,000 SKU's," he noted. Malson stressed the emphasis McKesson places on productivity. For example, McKesson's overall productivity per employee has increased over the last 10 years from $ 300,000 a year to over $ 1 mil. "Using the key measure of order lines picked per manhour, since 1980 office productivity has increased 70%," Mason said. "The cost for McKesson to process a line is about 14% below the industry average." Although McKesson is looking to increase revenues through expansion, it is at the same time reducing costs by consolidating internally. This trend is reflected in the wholesale drug distribution industry overall, which, while continuing to grow, is simultaneously experiencing a shrinking number of competitors. McKesson recently received a set back in its consolidation activities when the FTC blocked the wholesaler's planned acquisitions of Alco and Northwestern Drug. McKesson Chairman and President Thomas Field, however, is not interpreting the FTC action as a permanent roadblock to expansion through acquisition. "There are many individual geographic markets where we believe we would not encounter a similar problem," Field told the analysts. "We hope to get our share of them as the drug distribution industry continues to consolidate." McKesson is also "re-examining the European market for distribution opportunities," Field noted, "particularly in light of the 1992 removal of trade barriers in the common market. He noted that the company is also "examining" joint ventures among other distributors "both here and abroad." On Nov. 11, McKesson announced the sale of its wine and spirits wholesale division to Sunbelt Beverage Corp., continuing the company's strategic focus on drug wholesaling. McKesson will hold a minority interest in Sunbelt Beverage Corp. -- a new company formed by a leveraged buyout group led by Raymond R. Herrmann, former president of the division. The buyout was arranged by Weiss, Peck & Greer, a New York investment firm.
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