Covering Analyst: Cecilia Xia

Company Overview

›Oldest Healthcare Company ›Found by John McKesson and Charles Olcott in 1883 ›180 years ›Delivers Pharmaceuticals, Medical supplies and healthcare IT ›Headquartered in San Francisco

Company Overview Cont. ›Nation’s largest health-care provider ›Recognized by Fortune magazine as the #1 healthcare distributor for innovation, people management and financial soundness. ›Is ranked at 14 th on the Fortune 500

Business Segments

›Distribution Solutions ›Technology Solutions Revenue Segment2012 Revenue (In Million) 2013 First Three Quarters Revenue (In Million) Distribution Solutions119,424 (97.30%) 89,347 (97.29%) Technology Solutions3,310 (2.70%) 2,488 (2.71%)

Distribution Solutions FY12 Milestones ›U.S. Pharmaceutical –Grew Rev. 7%; Expanded Health Mart from 2,787 to 2,941 stores; Grew OneStop Generics 8% ›Specialty Health –Completed integration of US Oncology ›Canada –Grew Rev. 5%; achieved profit growth in a difficult regulatory environment ›Medical-Surgical –Grew Rev. 8%; Pharmaceutical sales to physician offices grew 12% ›Pharmacy Systems & Automation –Grew Rev. 22%; increased customer 23%

Market Share : Leading Market Position SegmentsMarket share U.S. Pharmaceutical#1 Specialty Health#2 Medical-Surgical#1 McKesson Canada#1

Technology Solutions ›2.7% of total revenue, 15% of the operating profit ›45.62%, 43.97% Profit Margin in 2012, 2011

Industry Analysis

›Government Spending: –1.2 trillion in 2013 (19.05% of GDP) –1.1 trillion in 2012 (17.74% of GDP) ›Affordable Care Act: –950 billion cost over 10 years –15 % (32 million) currently uninsured ›Health Information Technology for Economic and Clinical Health Act: –Required install Healthcare Information Technology ›Brand-to-Generic –Better Profit Margin, Lag on Topline ›Generic New Approvals –More products available, Industry moving fast

Create Shareholder Value

Increasing Dividend ›FY07: $0.24 ›FY12: $0.80 (233% increase)

Acquisitions FY07-FY12: 17 Acquisitions Distribution Solutions (4.1 Billion) 17 Acquisitions Technology Solutions (2.2 Billion)

Share Repurchase ›Since FY 07: Diluted Weighted Average Shares Outstanding ›Additional $500 million repurchase on top of $360 million this quarter

Comparable Analysis

›AmerisourceBergen Corporation – 50% ›Cardinal Health – 15% ›Owens & Minor – 15% ›Henry Schein – 10% ›Omnicare – 10%

Metrics

DCF Analysis

Revenue Model ›Steady Revenue Growth – DS ›5% CAGR ›Estimate 1.05%- 2.1% for year 2013 to 2018

Revenue Model ›Steady Revenue Growth – TS ›2% CAGR ›Estimate 1.86%-3.3% for year

Working Capital Model & DCF Model ›Percent of Revenue ›COGS: different than I/S ›SG&A: Grouped together in Qs

Final Valuation

Questions

Recommendation ›Based on my comparable model and DCF analysis, MCK is trading at a discount. The industry trend will provide the company more growing opportunity. ›I recommend a buy for Tall Firs and Svigals

Appendix – Brand-to-Generics

U.S. Oncology Aquisition ›November 2010 mck spent $2.16 billion to buy us oncology ›a physician practice management company for cancer doctors and with a more than 17% of all cancer patients. ›It sells lots of medical equipment and drugs to doctors’ offices. It is like a big customer plugged in as a subsidiary. ›Amerisourcebergen and cardinal health the two biggest providers of cancer drugs will no longer have the opportunity to sell to U.S. Oncology practices. ›

Reimbursement ›Reimbursement: The president and congressional republicans are still looking for common ground on fiscal cliff measures, including a postponement of scheduled Medicare payment cuts, which would result in a 27 percent reduction in reimbursement to all Medicare providers

Appendix – Profiles of MCK Distribution Solution

TS- Relayhealth ›28,000+ healthcare transactions/minute ›2000+ hospitals & health systems ›80+ health information exchanges ›200,000+ Physicians ›1900 Payers ›21Million + Patient records ›50,000 + Retail Pharmacies

Appendix – Management Team (DS)

Appendix – Management Team (TS)