McKesson Aims for Low Profile in Wake of Accounting Scandal
Prescription drug distributor McKesson Corp. has been a headache to shareholders for years, but the pain finally may be subsiding for investors in one of the nation’s oldest and largest companies.
The San Francisco-based company has had to cope with the fallout from a costly accounting scandal, grapple with declining profit margins and, most recently, respond to government inquiries into its business practices. A former McKesson executive charged in the accounting case is awaiting a judge’s verdict.
All that misery brought unwelcome attention to McKesson, a company that has preferred to serve patients from behind the scenes since it first set up shop in 1833 as a wholesaler of medicinal plants, vegetable extracts and herbs. Its stock, which climbed close to $100 a share in 1998 and then plunged below $20 two years later, has been on the rise most of this year and now trades for about $40 a share.
“We’re a well-kept secret,” McKesson Chairman John Hammergren said. “If we are doing our jobs, the consumer should never hear of us.”
Even as it strives to keep a low profile, McKesson hopes to use its distribution arm and technology services to help reshape the way the healthcare industry manages prescription drugs, medical supplies and patient information.
“It’s a very intriguing company that touches just about everything in healthcare,” said Eric Coldwell of Robert W. Baird & Co.
McKesson’s outlook appears to be brightening as the bad memories of a 6-year-old accounting fiasco slowly fade, thanks to a recent $960-million settlement of a class-action lawsuit filed by shareholders.
And the company’s earnings are picking up again, propelled by consumers’ growing use of generic drug products, which generate higher profits for distributors. The company also believes that its profit will improve under new contracts signed with most of the manufacturers producing branded drugs.
McKesson’s management is “more confident about our prospects than we have been in the past,” Hammergren told analysts this month as he reviewed the company’s results for its fiscal year ended in March.
Investors are feeling better about the company too. McKesson’s stock has gained 25% this year, restoring a sliver of the $9 billion in shareholder losses triggered by the accounting ruse uncovered after its takeover of HBO & Co. in 1999.
McKesson still faces a couple of wild cards -- separate inquiries by New York Atty. Gen. Eliot Spitzer and the Federal Trade Commission into how the company and its two smaller rivals, AmerisourceBergen Corp. and Cardinal Health Inc., obtain and price the prescription drugs they sell to pharmacies and hospitals for sale to consumers.
None of the involved parties are commenting on the inquiries, but industry analysts so far have expressed little concern, despite Spitzer’s previous crackdowns in the financial services industry.
McKesson has had far more trouble shaking the stink that trailed its $12-billion acquisition of HBOC, an Atlanta-based software maker that had been booking bogus sales leading up to the takeover.
The scam undermined the deal’s value, raising questions about McKesson’s credibility and creating a legal morass as angry investors swamped the company with lawsuits.
McKesson’s board promoted Hammergren to chief executive in mid-1999 to tackle perhaps the worst crisis in the company’s 172-year history.
Hammergren, who previously ran one of McKesson’s pharmaceutical supply divisions, tried to change the company’s priorities, removing the electronic ticker machines that provided workers with constant updates on McKesson’s stock price and installing customer satisfaction scorecards.
“We had to settle the culture down,” Hammergren said.
Since Hammergren took control, McKesson has grown into an even bigger player in the $200-billion market for prescription drug distribution.
In the last five years, McKesson’s sales have doubled to $80.5 billion, ranking it among the 15 largest U.S. companies.
Despite those strides, industry analysts say McKesson also has stumbled as Hammergren and his management team negotiated deals that undercut profit margins.
“They’ve made some strategic errors,” said A.G. Edwards & Sons analyst Andrew Speller. “McKesson has been as erratic as anybody.”
The federal government’s ongoing criminal investigation into the accounting scandal ensures that it won’t easily be forgotten either.
With the worst of the scandal apparently behind the company, Hammergren is trying to shift the spotlight back to McKesson’s position in the health industry.
“What’s great about being at McKesson is every day you are touching someone’s life,” he said. “Not to denigrate a theme park or a fast-food franchise, but if we don’t do something right, someone at the other end of the transaction can die.”
