McKESSON CHAIN SALES IN FY 1993 EXCEEDED $4.4 BIL., WITH CHAIN WAREHOUSE SALES UP 26% TO $2.6 BIL.; LOWER PRICE INCREASES ARE HELPING McKESSON SIGN MORE CHAINS

McKesson's annual sales to chain drug stores are rapidly approaching $5 bil., according to results from its fiscal year ended March 31. In that 12-month period, the wholesaler surpassed $4.4 bil. in sales to chains -- splitting the total sales between its regular distribution business with chains ($1.84 bil.) and dock-to-dock shipments to chain warehouses ($2.61 bil.). The $1.84 bil. figure represented just over 30% of McKesson Drug's total $6.4 bil. non-warehouse revenues in 1993. The business with chain warehouses is a rapidly expanding one for McKesson, growing 26% in fiscal 1993 on top of a 21% jump the year before. McKesson generated the growth in the chain market despite the loss of a major chain customer at the beginning of the year. McKesson did not identify that customer in its annual report on fiscal 1993, but it was of sufficient size for the company to attribute a decline in "real growth" in units "to the loss" of that customer. McKesson's healthcare business showed real volume growth of 6% in 1993, down from an 8% growth in 1992. McKesson calls itself "the leading distributor to chain stores in the drug and health care industry." Its shares of sales in the chain markets indicates the strength of that claim. Based on its 1993 regular distribution sales to chains, McKesson controlled about 24% of the total $7.6 bil. business with that segment handled by National Wholesale Druggists' Association members. More impressively, McKesson represented about 40% of the total dock-to-dock business, according to recent figures from the NWDA 1992 Operating Survey. The wholesaler contends that the slowdown in price increases by drug manufacturers is actually working to its advantage in seeking new business with chains. McKesson maintains that many chains, as well as wholesalers, were playing the investment buying strategy during the period of frequent pharmaceutical price increases. With the quick profit opportunity gone from price changes, chains may be more willing to turn to a wholesaler for inventory control and distribution. McKesson's own voluntary Valu-Rite chain generated sales for the distributor of "more than $1.5 bil." in fiscal 1993. The revenues from supplying the nearly 4,000 Valu-Rite independents were "the largest part of McKesson's independent business," the wholesaler said. Each Valu-Rite store averages close to $1 mil. in sales, the wholesaler reports. Sales to independent pharmacies -- including the Valu-Rite stores -- totaled just over $3 bil. last year. Sales to hospitals were just under $1.5 bil., a level which is nearly double 1989 sales, McKesson noted. McKesson is using the Valu-Rite independents as the core on which to build a PPO network for its managed plan clients. The voluntary chain gives McKesson a ready-made smaller panel of pharmacies with which it can work to create special offers for clients. As McKesson's business with large-volume purchasers increases, its operating profits are becoming thinner in drug distribution. Its operating margin from its $11.3 bil. total health care service revenues dipped to 2% in 1993 from 2.1% in 1992 and 2.6% in 1991. Indicative of the very narrow margins in the business with chain warehouses, when the margins from those sales are removed from the health services margins, the operating profit level in the overall category climbs in 1993 to 2.6%. McKesson's surge of business with chains exemplifies one of the two diverging paths of rapid growth at the company. In its traditional distribution business, the fastest growth appears to lie with low-cost distribution to large-volume accounts. The second growth area is in the service/information area of claims processing and pharmaceutical plan management. The challenge for McKesson is to keep those businesses complementary and prevent one from negatively affecting the other. In its traditional business, McKesson is attempting to serve as an efficient, accommodating distributor of health care products. In its other role, through PCS and its recently-purchased subsidiary, Clinical Pharmacy Advantage, it is trying to actively control product choices, using its information base and electronic ties to retailers (and eventually to physicians) to affect sales levels of various products. The company is attempting to pursue both objectives simultaneously under the goal of serving as a "strategic intermediary in the chain that links all participants in the pharmaceutical delivery system." McKesson's effort to develop a "house-brand" generic business of 1,000 products from 17 selected suppliers is a small-scale example of the balancing act for the wholesaler. The wholesaler is actively pushing the growth of the Multi- Source Complete line: sales grew 51% to $81 mil. in fiscal 1993, with predictions of a 40% growth to $120 mil. this year. McKesson believes that the house-brand approach can improve margins by allowing the wholesaler to extract deeper discounts from suppliers and to charge more to customers for the improved service features. At the same time that it is building sales for selected generic manufacturers, however, McKesson has to continue doing business with other generic suppliers. The current multi-source manufacturers for the McKesson house-brand are Mylan, Schein, Lederle Standard, Apothecon, Warner-Chilcott, URL, Ethex, Barre- National, Par, NMC, Barr, Biocraft, Sidmak, Copley, Purepac, Lemmon and Glades. On a larger scale, McKesson is managing the dual roles as major customer for most pharmaceutical companies and product selector through its CPA formulary. PCS, the plan management arm of McKesson on which CPA is growing, has close to 30,000 plan clients with 35 mil. people enrolled. In the current fiscal year, PCS expects to handle about 175 mil. prescriptions or $4 bil. in drug expenditures. The CPA formulary is a 181-page booklet with short descriptions of step-care procedures for different indications as well as cost of therapy ratings. With a number of special discussions of hot categories such as ACE inhibitors and antidepressants, the CPA book is a cross between a traditional formulary listing of acceptable products and a drug therapy compendium, such as the USP Dispensing Information or Facts and Comparisons. The hybridization helps CPA to contend that its program is clinically driven as well as concerned with cost control. The formulary is not kind to many branded products. For example, of 14 Pfizer brands listed in the formulary, six carry an "NF" non-formulary designation. The half-dozen non-formulary Pfizer products are Procardia XL, Diflucan, Norvasc, Zithromax, Feldene, and Geocillin. Six of the products are noted as being multisource with mandated generic substitution. Only two, Zoloft and Glucotrol, are not restricted by either of those codes. A recent PCS processing contract with a consortium of large health insurers provides the firm with a potential first electronic step into the doctor's office as well as the pharmacy. The contract to provide nationwide, on-line medical claims handling network for the National Electronic Information Corporation was initiated at the beginning of this fiscal year. McKesson execs have described the strategic goal of having computer tie-ins to the physician's office and pharmacy as a way of influencing pharmaceutical care from the point of prescription to the point of dispensing. The company sees that as a prerequisite for developing capitation/risk programs in managed prescription care. The company has a risk plan prototype with Blue Cross/Blue Shield Federal Employee program with 3.4 mil. members. The contract guarantees specified savings for the customer based on drug utilization review, formulary compliance and generic substitution rates.