McKesson, the largest US pharmaceuticals distributor and healthcare information technology provider, will probably ring up more than $100bn in sales this fiscal year.
The eye-popping figure puts the group in elite company, but it is McKesson's expertise in squeezing out efficiencies that allows it to make profits from the razor-thin margins of drug distribution, reflected in last year's net income of $913m out of $93bn of sales.
McKesson is one of the large cogs in the immense machinery of private market healthcare in the US, where annual health spending exceeds $1,000bn and continues to rise. It is one of the three dominant pharmaceutical distributors, along with Cardinal Health and AmerisourceBergen, acting as middlemen and service providers for thousands of pharmacies, doctors, clinics, hospitals, health insurers and sometimes patients.
One of the US's oldest healthcare companies, McKesson started in 1833 in New York importing and distributing therapeutic products and chemicals. Using covered wagons, it laid the groundwork for the country's first national drug distribution network.
Less well-known than the pharmaceutical groups it serves, McKesson seeks to move beyond being a middleman to using its central position to help connect the fragmented US healthcare system and make it more efficient.
It also is looking for more business overseas, where it is a contractor for work on the UK National Health Service's ambitious project to build a national electronic medical records system. It also has IT business in France, and disease management operations in Australia and New Zealand.
Marc Owen, head of McKesson corporate strategy, said: "What we're trying to do in effect is be the back office and help to industrialise healthcare . . . Part of our role being at the centre of all this, being in the middle, is to see the opportunities to bring it all together and help broker it and make the system work better."
But what McKesson does most is sell drugs, and lots of them. It is the largest North American drug distributor, with a big presence in Canada, and owns a stake in Nadro, a distributor in Mexico. In the fiscal year ended March 31, the pharmaceutical business generated 95 per cent of McKesson's sales and 85 per cent of its operating profits.
The drug distribution industry has recently undergone a transition in its business model following a drug manufacturers' inventory and accounting scandal. In the past, distributors would arbitrage pricing changes by drugmakers by buying large quantities prior to price increases and making money from the difference. McKesson and its rivals have now moved to a service-oriented model, charging drugmakers a fee to help manage wholesale drug inventory.
Changing to a service model has made the distribution business more predictable, which allows McKesson to focus harder on squeezing more efficiency and profits out of it. Last year, it improved its margin 8 basis points to 1.53 per cent.
Robert Willoughby, analyst at Bank of America, rates McKesson stock as a "buy" and says the group is growing, cash-rich, and pushing to improve efficiency and market share.
The other side of McKesson is its healthcare IT and software business. Although much smaller than drug distribution, McKesson's healthcare IT business is the largest in the world.
It ranges from patient records, hospital systems - including automated processes for drug dispensing - and pharmacy systems to back-office and claims processing for payers, and internet portals and remote monitoring for patients.
IT sales increased 24 per cent last year to $1.9bn, with profits up 11 per cent to $159m, representing 10 per cent of McKesson's total operating profits.
Improving US healthcare computer network systems has increasing, broad political and business support.
However, the immense and fragmented US healthcare business poses challenges. Lack of funds and interoperability between healthcare IT systems are significant obstacles.
But the hope remains that eventually a more widespread, if not national, electronic medical records system could bring more efficiency to US healthcare.
McKesson sees itself at the nexus of several key pushes in healthcare: IT infrastructure, disease management services for patients, and improving the efficiency and costs of its distribution.
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