Mckesson Corporation

One Post Street
San Francisco, California 94104
U.S.A.
(415) 983-830Q

Public Company
Incorporated: August 4, 1928 as McKesson & Robbins
Employees: 17,200
Sales: $6.285 billion
Market Value: $1.549 billion
Stock Index: New York

McKesson Corporation’s journey to the highest ranking position in the wholesale distribution industry occurred over a period of many years. However, the changes in direction as well as management philosophies experienced by McKesson during its 150 years of business have resulted in a company that is resilient and secure in its future direction.

In 1833 John McKesson founded his own wholesale drug company in Manhattan with another partner, and the company was known as Olcott & McKesson. Twenty years and another partner later, the firm changed its name to McKesson & Robbins. Yet this was just the beginning of the changes experienced by McKesson. When John McKesson died in 1893, the McKesson heirs left the company in order to form the New York Quinine and Chemical Works. Subsequently, in 1926, McKesson & Robbins was sold to Frank D. Coster.

Coster was responsible for turning the respected name of McKesson & Robbins into one connected with scandal. Coster’s real name was Philip Musica, the son of a New York importer of Italian foods. The Musica family prospered in their import trade primarily by bribing the dock customs weigher to falsify the weight of the shipment. However, the prosperity did not last long and in 1909 the Musica team was arrested. Philip paid a $5,000 fine and served five months in prison for the crime.

The prison experience did not reform the Musicas, however, and when they were again arrested in 1913 the charges were similar. Their hair importing business, started after Philip left prison, was in debt for $500,000 in bank loans. Through a bank investigation it was discovered that the supposedly valuable hair pieces being used for collateral were in fact only worthless ends and short pieces of hair. The Musica family was caught trying to escape on a departing New Orleans ship. Philip was the scapegoat for the family escapades once again and served three years in prison. When he was released in 1916 he worked for the District Attorney’s office as an undercover agent named William Johnson.

During World War I Musica began a poultry business, but his entanglement with the law was not over. In 1920, although he was indicted on charges stemming from a murder case, he was never convicted and did not serve a prison sentence. Shortly afterward, Musica changed his business interests from poultry to pharmaceuticals, posing as president of Adelphi Pharmaceutical Manufacturing Company in Brooklyn. This company was actually a front for a bootlegging concern and Musica’s partner, Joseph Brandino, would later contribute to Musica’s suicide through his blackmail attempts.

Musica changed his name to Frank D. Coster after the close of Adelphi. With his secret past behind him, Coster managed to establish himself as a respectable businessman by starting a hair tonic company that had a supposedly large customer list. With this outwardly attractive collateral, Coster appeared to be a reasonable buyer for McKesson & Robbins in 1926. For 13 years after he purchased McKesson & Robbins, Coster was able to keep his identity a secret; he was even listed in Who’s Who in America where he was described as a businessman as well as a “practicing physician” from 1912 to 1914.

Coster’s true identity was revealed in 1938 when a company treasurer’s concern over the way the profits were being handled led to an investigation of McKesson & Robbins. The investigation uncovered that Coster had stolen $3 million from the company through the false customers he had set up and was also paying blackmail fees to his former partner, Brandino, who had discovered Coster’s true identity and threatened to expose him. In 1939 Coster shot himself, Brandino was convicted of blackmail, and McKesson & Robbins once again returned to the normal conduct of business.

The company’s calm and relatively quiet existence was intruded upon in 1967 when Foremost Dairy of California implemented a hostile takeover. The management of McKesson & Robbins was not pleased with this takeover and this resulted in an unhappy relationship between the two companies for several years after the merger. In fact, it was three years before McKesson offices were even moved to San Francisco, the headquarters of Foremost.

The new company formed by this merger, Foremost-McKesson, Inc. had no company strategy and was moving in several different directions at the same time. Rudolph Drews, head of Foremost-McKesson, is described by Forbes magazine as the “freewheeling” president who acquired several diverse companies from “sporting goods to candy” after the merger with McKesson, and who was better at making acquisitions than at managing the company. In 1974 Drews was forced from the corporation after a day long board meeting; his management style was considered the cause for a “flattening” of earnings.

Drews’ response, “I’ll be back,” after he was fired from Foremost-McKesson was no idle threat. Drews established his own corporate-merger consulting business and found an opportunity in 1976 to orchestrate a takeover bid of his former company. Drews’ middleman for this takeover bid was Victor Posner, a Miami multimillionaire who saw an opportunity to buy out Foremost-McKesson. William Morison, the new president of Foremost-McKesson, worked hard to resist this bid by Sharon Steel, Posner’s Pennsylvania firm. Posner was able to obtain 10% of Foremost-McKesson’s stock before Morison began the company’s defensive strategy of careful planning, research and public relations moves that produced some valuable information on the Sharon Steel Corporation bid—the company had overstated its earnings for 1975 by 45%.

Posner’s bid was unacceptable to Foremost-McKesson not only because of the connection with Drews, but also because of Posner’s takeover tactics. Forbes states that Posner was “scourged coast to coast” for his tactics as a “corporate marauder.” In response to Posner’s success at buying 10% of Foremost-McKesson’s stock and to guard against any similar activity in the future, Foremost-McKesson stockholders approved a charter change which prohibited any “unsuitable” part from acquiring over 10% of the company’s common stock. An unsuitable party was defined as any business that might jeopardize Foremost’s liquor or drug licenses.

The attempted takeover by Posner was a problem for Foremost-McKesson for many reasons. While the bid was dropped in April of 1976, the company had lost valuable time in executing the “turnaround plans” devised by the new president William Morison. Morison took over after Drews’ departure in 1974 and was determined to make the company a more dynamic, streamlined operation. Up to this point, Foremost-McKesson had been viewed as two companies wedded together with no real direction and no real activity. Morison complained that, “people on he East Coast think of us as McKesson the drug company, and people on the West coast think of us as Foremost the dairy company, and we don’t think either one really fits anymore.

With Morison’s turnaround plans, Foremost-McKesson was creating a new image for itself. In 1977, Executive Vice President Thomas E. Drohan, compared the company to an elephant that, under the new direction of Morison, was now “off its knees and ambling noisily.”

During its $14 million fight with Sharon Steel Corporation in 1976, Foremost-McKesson made two major acquisitions and sold or combined 11 of its less significant operations. Morison wanted to move the company away from its role of middleman as a wholesale distributor of pharmaceutical products, beverages and liquor, and emphasize production of proprietary products such as C.F. Mueller’s pasta products. Morison’s objective was to streamline the company by selling its low profit operations and investing $200 million into new businesses by 1990. The battle with Posner sidelined many of these goals, nevertheless Foremost’s acquisitions of C.F. Mueller Company the country’s largest pasta marker, and Gentry International, a processor of onion and garlic, were two significant acquisitions made in 1976 that met the objectives set by Morison.

Before Morison retired in 1978, he reorganized the company into four major operating groups: drugs and health care, wine and spirits, foods, and chemicals, as well as a small homebuilding division. Morison’s strategic plan was the first of its kind for Foremost-McKesson, and it was one factor that placed the company in a more comfortable position for the future.

This strategy continued after Morison’s retirement when Thomas P. Drohan took over as president. Drohan’s defense against a corporate raider was to maintain a high stock price. And Drohan’s style of management was to improve productivity along with saving money. Specifically, he updated the inventory and stock procedures so that computers were used to order stock, allowing Foremost to reduce personnel costs by a third.

Drohan also redefined the role of the middleman by establishing data processing procedures that would be valuable to both suppliers and customers, placing Foremost-McKesson in the position of acting as part of the marketing teams. These practices in the early 1980’s put Foremost-McKesson in the position of a leader in wholesale practices. The company’s investment in the wholesale business, automating warehousing, and data processing led to an average profit growth of 20% per year compared with the 2% average growth before 1976.

The 1980’s saw a different type of company than the one described as “lethargic” only a decade earlier. The acquisitions made in the early part of the 1980’s were made to strengthen the company’s role as a major distributor of health care products. In 1983, the same year that the company name was changed to McKesson Corporation, $90 million was spent on acquisitions of distributor and distributor-related industries. In 1982 the drug distribution business contributed $2.1 billion to the company’s $4 billion in sales. Net sales for the first part of the 1980’s increased steadily, with only a slight drop in 1983.

The company diversified within the chemical industry as well. The McKesson chemical group has played an important role in the company’s sales. The company purchased its first chemical recycling plant in 1981, with plans to build six additional plants around the country. The chemical solvent recycling was a profitable business because of the strict Resource Conservation and Recovery Act (RCRA) legislated in Congress that mandated environmentally safe disposal processes. McKesson expected to obtain 10% of the 1986 chemical solvent market.

Neil Harlan has been the chairman of McKesson Corporation since 1979. He is a former army captain, Harvard business professor, and McKinsey & Company director. Harlan’s approach to management of the company has resulted in selling the pieces of the company that did not fit its distribution image. Specifically, C.F. Mueller was sold in 1983. Harlan stated that his company “erred” when Mueller was purchased in 1976 because Foremost-McKesson had no “east-coast presence in foods” and “few opportunities for combining sales forces, regional offices, or marketing efforts.”

McKesson also sold Foremost Diaries in 1983, along with its food processing and homebuilding subsidiaries, all of which were 30% of the “old company’s” assets. These subsidiaries no longer fit the “distribution vision” presented by Chairman Harlan.

Acquisition has been a key component of McKesson’s management strategy since 1984. Acquisitions have included additional drug and health care product distributors, software firms, and drug and medical equipment distributors. The chemical group is still the least profitable group within the company because the centralized purchasing system applied to the drug and liquor wholesale distribution does not work as well in the chemical industry. Harlan states that he “hopes that our history shows we will not be afraid to make the hard decision [to get out of chemicals] if it’s warranted.”

Harlan’s approach has made McKesson one of the leaders in wholesale distribution. His strategy is two-fold; he believes that “any company that doesn’t stick to what it does best is inviting trouble” and that “anybody who doesn’t prepare [for a raider] is living in a dreamworld.” With this approach to managing a large corporation such as McKesson, the company has clearly established specific objectives for the future.

Principal Subsidiaries

Alhambra National Water Co., Inc.; California Culinary Academy, Inc.; Corporation of America; D’Amico Foods Co.; Dresden/Davis Organization, Inc.; Foremost Foods, Inc.; Foremost-McKesson Canada, Inc.; Foremost-McKesson Property Co., Inc. The company also lists subsidiaries in the following countries: Ecuador, Italy, Lebanon, The Netherlands, Taiwan, and Thailand.

McKesson Corporation

One Post Street
San Francisco, California 94104
U.S.A.
(415) 983-8300
Fax: (415) 983-7160

Public Company
Incorporated: 1928 as McKesson & Robbins
Employees: 14,500
Sales: $12.43 billion
Stock Exchanges: New York Pacific
SICs: 5122 Drugs, Proprietaries, and Sundries; 5047 Medical
and Hospital Equipment; 5199 Non-Durable Goods, Not
Elsewhere Classified; 2086 Bottled & Canned Soft Drinks;
3581 Automatic Vending Machines

With industry-leading operations in the United States, Canada, and Mexico, McKesson Corporation is North America’s largest pharmaceutical wholesaler. The company also has interests in bottled water and automotive care; its Sparkletts brand water ranked second in this fast-growing beverage category in the early 1990s, and its Armor All car-care products dominated their market. Although these two segments contributed less than four percent of McKesson’s annual revenues, they added almost one-third of operating profits. In spite of uncertainties that troubled the health care industry in the 1990s, McKesson was considered well-positioned to take advantage of virtually any eventualities.

In 1833 John McKesson and a partner founded Olcott & McKesson, a wholesale drug company in Manhattan. Twenty years and another partner later, the firm changed its name to McKesson & Robbins. Yet this was just the beginning of the changes experienced by McKesson. When John McKesson died in 1893, the McKesson heirs left the company in order to form the New York Quinine and Chemical Works.

In 1926, McKesson & Robbins was sold to Frank D. Coster. The ownership transition plunged McKesson & Robbins into 13 years of disrepute attributed directly to its new owner and his crime-prone family. Coster, whose real name was Philip Musica, was the son of a New York importer of Italian foods. The Musica family had prospered in the import trade primarily by bribing dock customs officials to falsify shipment weights. When the Musica team was arrested in 1909, Philip paid a $5,000 fine and served five months in prison for the crime.

The prison experience did not reform the criminal family, however, and they were again arrested in 1913 on similar charges. This time, a hair importing business started after Philip left prison had racked up $500,000 in bank debt based on virtually nonexistent security. A bank investigation revealed that the supposedly valuable hair pieces being used for collateral were in fact only worthless ends and short pieces of hair. The Musica family was caught trying to escape on a departing New Orleans ship. Once again, Philip was the scapegoat for the family escapades; he served three years in prison. When he was released in 1916 he worked for the District Attorney’s office as an undercover agent named William Johnson.

During World War I Musica began a poultry business, but his entanglement with the law was not over. After evading conviction for a 1920 murder, he changed his business interests from poultry to pharmaceuticals, posing as president of Adelphi Pharmaceutical Manufacturing Company in Brooklyn. In spite of many “second chances,” Musica appeared unable to avoid a life of crime; his new venture, a partnership with Joseph Brandino, was actually a front for a bootlegging concern.

When Adelphi failed, Musica changed his name to Frank D. Coster. Hoping to put his criminal past behind him, Coster managed to establish himself as a respectable businessman by starting a hair tonic company that had a supposedly large customer list. With this apparently firm collateral, Coster seemed a viable acquirer when he offered to purchase McKesson & Robbins in 1926. In fact, for 13 years thereafter, Coster was able to keep his identity a secret; he was even listed in Who’s Who in America, where he was described as a businessman as well as a “practicing physician” from 1912 to 1914.

Coster went on an acquisition spree when the Great Depression weakened many competitors. In 1928 and 1929 alone, he added wholesale drug companies in 42 cities to McKesson & Robbins’s American and Canadian operations. Five more were acquired from 1930 to 1937.

Coster’s true identity was revealed in 1938 when a treasurer at McKesson & Robbins became concerned over the way the profits were being handled. That curiosity soon led to an investigation that revealed a $3 million embezzlement scheme perpetrated by Coster. Some of the money was used to pay blackmail fees to his former partner, Brandino, who had discovered Coster’s true identity and threatened to expose him. In 1939 Coster shot himself and Brandino was convicted of blackmail.

The company reorganized in the early 1940s and returned to private ownership. Its operations were presumably closely held during this period. However, the company’s calm and relatively quiet existence was intruded upon in 1967 when Foremost Dairy of California implemented a hostile takeover. Acrimony over the conduct of the buyout fostered an unhappy relationship between the managers of the new “partners” for several years after the merger. In fact, it was three years before McKesson offices were even moved to San Francisco, the headquarters of Foremost.

The new company formed by this merger, Foremost-McKesson, Inc. had no corporate strategy and appeared to be moving in several different directions at the same time. Rudolph Drews, head of the unified firm, was described by Forbes magazine as the “freewheeling” president who had acquired several diverse companies from “sporting goods to candy” after the merger with McKesson, and who was better at making acquisitions than managing them. In 1974 Drews was forced from the corporation after a day long board meeting; his management style was considered the cause for a “flattening” of earnings.

Drews’ response, “I’ll be back,” after he was fired from Foremost-McKesson was no idle threat. Drews established his own corporate-merger consulting business and found an opportunity in 1976 to orchestrate a takeover bid of his former company. Drews’ middleman for the corporate raid was Victor Posner, a Miami multimillionaire who saw his own opportunity to buy out Foremost-McKesson. William Morison, who had succeeded Drews as president of Foremost-McKesson, worked hard to prevent Sharon Steel, Posner’s Pennsylvania firm, from acquiring his company’s stock. Although Posner was able to obtain ten percent of Foremost-McKesson’s equity, he soon found that the price of the stock could be measured in more than dollars and cents.

Morison’s defense strategy focused on a negative public relations campaign that targeted Posner and Sharon Steel. Careful, well-publicized research revealed that Sharon Steel Corporation had overstated its earnings for 1975 by 45 percent in order to support its takeover offer. According to Forbes, Posner was “scourged coast to coast” for his tactics as a “corporate marauder.” Having repulsed Posner and Drews’ takeover attempt, Foremost-McKesson stockholders approved a charter change which prohibited any “unsuitable” party from acquiring over ten percent of the company’s common stock. An unsuitable party was defined as any business that might jeopardize Foremost’s liquor or drug licenses.

Although the takeover crisis only lasted a few months, Foremost-McKesson suffered long-term consequences. The company had lost valuable time in executing the turnaround plans devised by the new president William Morison. Morison was determined to make the company a more dynamic, streamlined operation. Up to this point, Foremost-McKesson had been viewed as two companies wedded together with no real direction or focus. Morison complained that “people on the East Coast think of us as McKesson the drug company, and people on the West coast think of us as Foremost the dairy company, and we don’t think either one really fits anymore.” Morison hoped not only to turn Foremost-McKesson around operationally, but also to create a new corporate image. In 1977, Executive Vice-President Thomas E. Drohan, compared the company to an elephant that, under the new direction of Morison, was now “off its knees and ambling noisily.”

Morison had, in fact, worked to implement a reorganization in the midst of the 1976 battle to maintain autonomy. That year, Foremost-McKesson made two major acquisitions and sold or combined 11 of its less vital operations. Morison wanted to move the company away from its role of middleman as a wholesale distributor of pharmaceutical products, beverages and liquor, and emphasize production of proprietary products. His objective was to streamline the company by selling its low profit operations and investing $200 million into new businesses by 1990. Although the battle with Posner sidelined many of these goals, Foremost’s acquisitions of C.F. Mueller Company, the country’s largest pasta marker, and Gentry International, a processor of onion and garlic, were two significant acquisitions made in 1976 that met the objectives set by Morison.

Over the course of the two years before Morison’s retirement, he reorganized the company into four major operating groups: drugs and health care, wine and spirits, foods, and chemicals, as well as a small home-building division. This new strategic plan was the first of its kind for Foremost-McKesson, and it was one factor that placed the company in a more comfortable position for the future.

Thomas P. Drohan, who was elected president upon Morison’s 1978 retirement, continued his predecessor’s strategy. Drohan’s defense against corporate raids was to maintain a prohibitively high stock price. His management style focused on productivity and efficiency. Specifically, he automated inventory and stock procedures, allowing Foremost to reduce personnel costs by a third.

Drohan also redefined the company’s “middleman” role in the distribution chain by establishing data processing procedures that would be valuable to both suppliers and customers, placing Foremost-McKesson in the position of acting as part of the marketing teams. This business strategy has been characterized by one Harvard Business Review analyst as a “value-adding partnership.” Over the course of the 1980s, independent druggists were faced with competition from powerful mass and discount drug chains. Foremost-McKesson’s value-adding partnership offered these small businessmen—many of whom could not afford the computerized inventory controls that were a key to the national chains’ success—the benefits of automated systems without the expense. These practices catapulted the company to the vanguard of wholesale practices and contributed to average annual profit increases of 20 percent, ten times the rate recorded before 1976.

Neil Harlan succeeded to the chairmanship of Foremost-McKesson in 1979. A former army captain, Harvard business professor, and McKinsey & Company director, Harlan soon initiated a second restructuring, selling the pieces of the company that did not fit its distribution image. In 1983 alone, Harlan divested over one-third of the conglomerate’s holdings to focus on health care and retail products. Divisions sold included C.F. Mueller as well as Foremost Dairies and its food processing and residential construction subsidiaries.

Acquisitions made in the early part of the decade strengthened Foremost-McKesson’s role as a major distributor of health care products. In 1982 the drug distribution business contributed $2.1 billion to the company’s $4 billion in sales. Fueled by $90 million in acquisitions of distribution and distribution-related businesses, revenues increased steadily in the early 1980s. Harlan’s aggressive consolidation helped make McKesson one of the leaders in wholesale distribution. His strategy was twofold; he believed that “any company that doesn’t stick to what it does best is inviting trouble” and that “anybody who doesn’t prepare [for a raider] is living in a dreamworld.” A 1983 name change, to McKesson Corporation, reflected the declining influence of food operations.

Harlan, a popular leader, retired in 1986 and was succeeded by Thomas W. Field, Jr., formerly of American Stores Co., a national grocery chain. That same year, McKesson sold its poorly-performing chemical distribution division, McKesson Chemical, to Univar Corp. for $76 million. Proceeds of the sale funded acquisitions of additional drug and health care product distributors, software firms, and medical equipment distributors. The company also raised funds for capital investments through the public offering of shares amounting to about 15 percent of subsidiary Armor All Products Corp. and a similar stake in prescription reimbursement division PCS Health Systems Inc. in 1986. Part of the proceeds went toward a $115 million expenditure on increased automation and efficient new distribution hubs.

McKesson had acquired Armor All, the company that launched the automotive protective market, in 1979. After suffering five years of limited profits, Armor All took off in the late 1980s. Within four years of entering the Japanese market in 1984, the product had captured one-fourth of the market. By the late 1980s, Armor All had achieved $126 million in annual sales and held 90 percent of the U.S. auto protectant market. Hoping to parlay its complete dominance of this category into continuously-increasing sales, McKesson expanded Armor All’s product line to include car waxes, detergents, and spray cleaners. By 1993, the products were offered in over 50 countries. McKesson’s bottled water subsidiary also paid off during this period: from 1980 to 1990, the American market for bottled water grew by 250 percent, and McKesson’s Sparklett’s brand enjoyed a number-two ranking in that industry.

Although profits rose 33 percent and sales increased 46 percent over the course of CEO Field’s term in office, he abruptly resigned in September 1989 amid difficulties related to McKesson’s prescription reimbursement division, PCS Health Systems Inc. PCS managed pharmaceutical costs for the sponsors of corporate, government, and insurance health care plans by performing cost-benefit analyses of drugs and recommending the top candidates to their customers. Under pressure from insurance companies to cut costs, PCS had tried to reduce reimbursements to pharmacists and drug store chains. When major customers—including Rite Aid Corp. and Wal-Mart Stores— balked at the cuts, McKesson scrambled to keep both its constituencies satisfied. Neil Harlan carne out of retirement to serve as McKesson’s interim CEO. Harlan was able to rejoin the ranks of the retired by the end of the year, when Alan Seelenfreund, a 14-year veteran of McKesson, advanced to chairman and CEO.

Ironically, after causing such an uproar in the late 1980s, PCS evolved into a vital segment of McKesson’s business in the early 1990s. During that time, PCS recorded sales and earnings increases of 50 percent annually, and although the company only contributed two percent of McKesson’s annual sales, it brought in 20 percent of its profits. The parent company moved to transform PCS into what Business Week called “a full-fledged medical-services-management company” through the early 1994 acquisition of Integrated Medical Systems Inc., an electronic network designed to connect doctors, hospitals, medical laboratories, and pharmacies. While these two acquisitions improved PCS’ operations, they also attracted the attention of an increasingly acquisitive pharmaceutical industry. In 1993, Merck & Co., then the world’s largest ethical drug company, bought Medco Containment, a rival drug distributor, for $6.6 billion.

Merck’s move prompted speculation that PCS and parent McKesson were the next logical takeover target. McKesson’s stock increased by over 40 percent from July 1993 (when the Medco deal was announced) to February 1994. To a limited extent, that speculation became reality later that year, when McKesson agreed to sell PCS to Eli Lilly & Co. for $4 billion in cash.

McKesson used the sale as an opportunity to restructure its finances: the company gave shareholders $76 plus a “new share in McKesson in exchange for each McKesson old share they held. The remaining $600 million in proceeds from the sale were reinvested in the company.

CEO Seelenfreund looked to McKesson’s future in the company’s annual report for 1993. He noted that “In the competitive environment created by efforts to bring rising health care costs under control, the winners will be those organizations that have both the financial strength and the technological skills needed to improve the quality of care while cutting their own costs and those of their customers. McKesson is one of the few companies that possess both these strengths.”

Principal Subsidiaries

Millbrook Distribution Services Co.; Armor All Products Corp.; McKesson Service Merchandising Co.; McKesson Water Products Co.; Medis Health & Pharmaceutical Services Inc. (Canada).

Further Reading

Byrne, Harlan S., “McKesson Corp.: Big Drug Distributor Bounces Back From a Bummer Year,” Barrons, June 25, 1990, pp. 51–52.

Hof, Robert, “McKesson Dumps Another Asset: The Boss, Business Week, September 25, 1989, p. 47.

Johnston, Russell, “Beyond Vertical Integration: The Rise of the Value-Adding Partnership,” Harvard Business Review, July/August 1988, pp. 94–101.

Mitchell, Russell and Joseph Weber, “And the Next Juicy Plum May Be McKesson?,” Business Week, February 28, 1994, p. 36.

Schlax, Julie, “Strategies: A Good Reason to Mess With Success,” Forbes, September 19, 1988, pp. 95–96.

—updated by April Dougal Gasbarre

McKesson Corporation

One Post Street
San Francisco, California 94104
U.S.A.
Telephone: (415) 983-8300
Fax: (415) 983-7160
Web site: http://www.mckesson.com

Public Company
Incorporated: 1928 as McKesson & Robbins
Employees: 23,000
Sales: $42.01 billion (2001)
Stock Exchanges: New York
Ticker Symbol: MCK
NAIC: 422210 Drugs and Druggists’ Sundries Wholesalers; 422990 Other Miscellaneous Nondurable Goods Wholesalers

McKesson Corporation on its web site describes itself as “the world’s largest supply management and healthcare information technology company.” With industry-leading operations in the United States, Canada, and Mexico, the company is North America’s largest pharmaceutical wholesaler. It specializes in distributing drugs and other healthcare products to hospitals, pharmacies, and retail stores including Wal-Mart and ShopKo. Its robotic and Internet-based technologies have led to a 99.9 percent customer order accuracy. As part of the growing healthcare industry, McKesson ranks as number 35 in the 2001 Fortune 500 list.

Origins and Changes in the 1800s and Early 1900s

In 1833 John McKesson and partner Charles Olcott founded Olcott & McKesson, a wholesale and import drug company in Manhattan that provided herbal products. Twenty years later with the addition of Daniel Robbins and the death of Olcott, the firm changed its name to McKesson & Robbins. Yet this was just the beginning of the changes experienced by McKesson. When John McKesson died in 1893, the McKesson heirs left the company in order to form the New York Quinine and Chemical Works. By 1900 McKesson & Robbins had partially consolidated its industry by convincing several large wholesale drug distributors to become McKesson subsidiaries.

In 1926, McKesson & Robbins was sold to Frank D. Coster. The ownership transition plunged McKesson & Robbins into 13 years of disrepute attributed directly to its new owner and his crime-prone family. Coster, whose real name was Philip Musica, was the son of a New York importer of Italian foods. The Musica family had prospered in the import trade primarily by bribing dock customs officials to falsify shipment weights. When the Musica team was arrested in 1909, Philip paid a $5,000 fine and served five months in prison for the crime.

The prison experience did not reform the criminal family, however, and they were again arrested in 1913 on similar charges. This time, a hair importing business started after Philip Musica left prison had racked up $500,000 in bank debt based on virtually nonexistent security. A bank investigation revealed that the supposedly valuable hair pieces being used for collateral were in fact only worthless ends and short pieces of hair. The Musica family was caught trying to escape on a departing New Orleans ship. Once again, Philip was the scapegoat for the family escapades; he served three years in prison. When he was released in 1916 he worked for the District Attorney’s office as an undercover agent named William Johnson.

During World War I, Musica began a poultry business, but his entanglement with the law was not over. After evading conviction for a 1920 murder, he changed his business interests from poultry to pharmaceuticals, posing as president of Adelphi Pharmaceutical Manufacturing Company in Brooklyn. In spite of many “second chances,” Musica appeared unable to avoid a life of crime; his new venture, a partnership with Joseph Brandino, was actually a front for a bootlegging concern.

When Adelphi failed, Musica changed his name to Frank D. Coster. Hoping to put his criminal past behind him, Coster managed to establish himself as a respectable businessman by starting a hair tonic company that had a supposedly large customer list. With this apparently firm collateral, Coster seemed a viable acquirer when he offered to purchase McKesson & Robbins in 1926. In fact, for 13 years thereafter, Coster was able to keep his identity a secret; he was even listed in Who’s Who in America, where he was described as a businessman as well as a “practicing physician” from 1912 to 1914.

Coster went on an acquisition spree when the Great Depression weakened many competitors. In 1928 and 1929 alone, he added wholesale drug companies in 42 cities to McKesson & Robbins’s American and Canadian operations. Five more firms were acquired from 1930 to 1937. Meanwhile, 1929 sales had reached $140 million, and the company earned $4.1 million in profits.

Coster’s true identity was revealed in 1938 when a treasurer at McKesson & Robbins became concerned over the way the profits were being handled. That curiosity soon led to an investigation that revealed a $3 million embezzlement scheme perpetrated by Coster. Some of the money was used to pay blackmail fees to his former partner, Brandino, who had discovered Coster’s true identity and threatened to expose him. In 1939 Coster shot himself and Brandino was convicted of blackmail.

Post-World War II History

The company reorganized in the early 1940s and returned to private ownership. Its operations were presumably closely held during this period. The company’s calm and relatively quiet existence was intruded upon in 1967, however, when Foremost Dairies of California implemented a hostile takeover. Acrimony over the conduct of the buyout fostered an unhappy relationship between the managers of the new “partners” for several years after the merger. In fact, it was three years before McKesson offices were even moved to San Francisco, the headquarters of Foremost.

The new company formed by this merger, Foremost-McKesson, Inc., had no corporate strategy and appeared to be moving in several different directions at the same time. Rudolph Drews, head of the unified firm, was described by Forbes magazine as the “freewheeling” president who had acquired several diverse companies from “sporting goods to candy” after the merger with McKesson and who was better at making acquisitions than managing them. In 1974 Drews was forced from the corporation after a daylong board meeting; his management style was considered the cause for a “flattening” of earnings.

Drews’s response, “I’ll be back,” after he was fired from Foremost-McKesson was no idle threat. Drews established his own corporate merger consulting business and found an opportunity in 1976 to orchestrate a takeover bid of his former company. Drews’s middleman for the corporate raid was Victor Posner, a Miami multimillionaire who saw his own opportunity to buy out Foremost-McKesson. William Morison, who had succeeded Drews as president of Foremost-McKesson, worked hard to prevent Sharon Steel, Posner’s Pennsylvania firm, from acquiring his company’s stock. Although Posner was able to obtain 10 percent of Foremost-McKesson’s equity, he soon found that the price of the stock could be measured in more than dollars and cents.

Morison’s defense strategy focused on a negative public relations campaign that targeted Posner and Sharon Steel. Careful, well-publicized research revealed that Sharon Steel Corporation had overstated its earnings for 1975 by 45 percent in order to support its takeover offer. According to Forbes, Posner was “scourged coast to coast” for his tactics as a “corporate marauder.” Having repulsed Posner and Drews’s takeover attempt, Foremost-McKesson stockholders approved a charter change that prohibited any “unsuitable” party from acquiring more than 10 percent of the company’s common stock. An unsuitable party was defined as any business that might jeopardize Foremost’s liquor or drug licenses.

Although the takeover crisis only lasted a few months, Foremost-McKesson suffered long-term consequences. The company had lost valuable time in executing the turnaround plans devised by the new president, William Morison. Morison was determined to make the company a more dynamic, streamlined operation. Up to this point, Foremost-McKesson had been viewed as two companies wedded together with no real direction or focus. Morison complained that “people on the East Coast think of us as McKesson the drug company, and people on the West Coast think of us as Foremost the dairy company, and we don’t think either one really fits anymore.” Morison hoped not only to turn Foremost-McKesson around operationally, but also to create a new corporate image. In 1977, Executive Vice-President Thomas E. Drohan compared the company to an elephant that, under the new direction of Morison, was now “off its knees and ambling noisily.”

Morison had, in fact, worked to implement a reorganization in the midst of the 1976 battle to maintain autonomy. That year, Foremost-McKesson made two major acquisitions and sold or combined 11 of its less vital operations. Morison wanted to move the company away from its role of middleman as a wholesale distributor of pharmaceutical products, beverages, and liquor, and emphasize production of proprietary products. His objective was to streamline the company by selling its low-profit operations and investing $200 million into new businesses by 1990. Although the battle with Posner sidelined many of these goals, Foremost’s acquisitions of C.F. Mueller Company, the country’s largest pasta marker, and Gentry International, a processor of onion and garlic, were two significant acquisitions made in 1976 that met the objectives set by Morison.

Over the course of the two years before Morison’s retirement, he reorganized the company into four major operating groups: drugs and healthcare, wine and spirits, foods, and chemicals, as well as a small home-building division. This new strategic plan was the first of its kind for Foremost-McKesson, and it was one factor that placed the company in a more comfortable position for the future.

Company Perspectives:

McKesson’s mission is to advance the health of the healthcare system by advancing the success of our partners.

Thomas P. Drohan, who was elected president upon Morison’s 1978 retirement, continued his predecessor’s strategy. Drohan’s defense against corporate raids was to maintain a prohibitively high stock price. His management style focused on productivity and efficiency. Specifically, he automated in ventory and stock procedures, allowing Foremost to reduce personnel costs by a third.

Drohan also redefined the company’s “middleman” role in the distribution chain by establishing data processing procedures that would be valuable to both suppliers and customers, placing Foremost-McKesson in the position of acting as part of the marketing teams. This business strategy has been characterized by one Harvard Business Review analyst as a “value Adding partnership.” Over the course of the 1980s, independent druggists were faced with competition from powerful mass and discount drug chains. Foremost-McKesson’s value adding partnership offered these small business owners—many of whom could not afford the computerized inventory controls that were a key to the national chains’ success—the benefits of automated systems without the expense. These practices catapulted the company to the vanguard of wholesale practices and contributed to average annual profit increases of 20 percent, ten times the rate recorded before 1976.

Neil Harlan succeeded to the chairmanship of Foremost McKesson in 1979. A former army captain, Harvard business professor, and McKinsey & Company director, Harlan soon initiated a second restructuring, selling the pieces of the company that did not fit its distribution image. In 1983 alone, Harlan divested more than one-third of the conglomerate’s holdings to focus on healthcare and retail products. Divisions sold included C.F. Mueller as well as Foremost Dairies and its food processing and residential construction subsidiaries.

In 1983 McKesson acquired Zee Medical, Inc. Formed in 1959, Zee Medical provided occupational safety and first-aid products. This McKesson subsidiary had grown rapidly after the federal government in 1971 increased workplace safety demands through OSHA. By around 2000 Zee Medical was a $100 million business that served more than 300,000 manufacturing plants, hotels, and other facilities.

Acquisitions made in the early part of the decade strengthened Foremost-McKesson’s role as a major distributor of healthcare products. In 1982 the drug distribution business contributed $2.1 billion to the company’s $4 billion in sales. Fueled by $90 million in acquisitions of distribution and distribution-related businesses, revenues increased steadily in the early 1980s. Harlan’s aggressive consolidation helped make McKesson one of the leaders in wholesale distribution. His strategy was twofold; he believed that “any company that doesn’t stick to what it does best is inviting trouble” and that “anybody who doesn’t prepare [for a raider] is living in a dreamworld.” A 1984 name change, to McKesson Corporation, reflected the declining influence of food operations.

Harlan, a popular leader, retired in 1986 and was succeeded by Thomas W. Field, Jr., formerly of American Stores Co., a national grocery chain. That same year, McKesson sold its poorly performing chemical distribution division, McKesson Chemical, to Univar Corp. for $76 million. Proceeds of the sale funded acquisitions of additional drug and healthcare product distributors, software firms, and medical equipment distributors. The company also raised funds for capital investments through the public offering of shares amounting to about 15 percent of subsidiary Armor All Products Corp. and a similar stake in prescription reimbursement division PCS Health Systems Inc. in 1986. Part of the proceeds went toward a $115 million expenditure on increased automation and efficient new distribution hubs.

Key Dates:

1833:

The partnership of Olcott & McKesson is founded.

1853:

The business is renamed McKesson & Robbins.

1893:

Founder John McKesson dies and his heirs leave the company.

1926:

Frank D. Coster, a criminal whose real name was Philip Musica, buys the company.

1928:

McKesson & Robbins is incorporated.

c.1940:

The company becomes privately owned after Coster kills himself in 1939.

1967:

Foremost Dairies takes over the company, which becomes Foremost-McKesson, Inc.

1970:

The company moves its headquarters to San Francisco.

1976:

The company avoids a hostile takeover, is reorganized, and acquires C.F. Mueller Company and Gentry International.

1979:

Armor All Products is acquired as McKesson enters the car protection products industry.

1983:

The company acquires Zee Medical, Inc. and sells C.F. Mueller and Foremost Dairies.

1984:

The company is renamed McKesson Corporation.

1986:

McKesson Chemical Division is sold to Univar Corporation.

1989:

McKesson gains Wal-Mart Stores as a major customer.

1990:

The company gains control of Medis Health and Pharmaceutical, Canada’s major drug wholesaler.

1994:

McKesson acquires Integrated Medical Systems Inc. and decides to sell PCS Health Systems to Eli Lilly & Company.

1998:

The company acquires Red Line HealthCare Corporation.

1999:

A January merger with HBO & Company creates McKesson HBOC Inc.; Kelly/Waldron & Company and Kelly Waldron/Technologies Solutions are acquired.

2000:

McKesson acquires Prospective Health, Inc. and sells its Water Products business; the company renews its contract with ShopKo Stores for five years.

2001:

The firm introduces Supply Management Online to increase its Internet capabilities.

McKesson had acquired Armor All, the company that launched the automotive protective market, in 1979. After suffering five years of limited profits, Armor All took off in the late 1980s. Within four years of entering the Japanese market in 1984, the product had captured one-fourth of the market. By the late 1980s, Armor All had achieved $126 million in annual sales and held 90 percent of the U.S. auto protectant market. Hoping to parlay its complete dominance of this category into continuously increasing sales, McKesson expanded Armor All’s product line to include car waxes, detergents, and spray cleaners. By 1993, the products were offered in more than 50 countries. McKesson’s bottled water subsidiary also paid off during this period: from 1980 to 1990, the American market for bottled water grew by 250 percent, and McKesson’s Sparklett’s brand enjoyed a number two ranking in that industry.

Although profits rose 33 percent and sales increased 46 percent over the course of CEO Field’s term in office, he abruptly resigned in September 1989 amid difficulties related to McKesson’s prescription reimbursement division, PCS Health Systems Inc. PCS managed pharmaceutical costs for the sponsors of corporate, government, and insurance healthcare plans by performing cost-benefit analyses of drugs and recommending the top candidates to its customers. Under pressure from insurance companies to cut costs, PCS had tried to reduce reimbursements to pharmacists and drugstore chains. When major customers—including Rite Aid Corp. and Wal-Mart Stores—balked at the cuts, McKesson scrambled to keep both its constituencies satisfied. Neil Harlan came out of retirement to serve as McKesson’s interim CEO. Harlan was able to rejoin the ranks of the retired by the end of the year, when Alan Seelenfreund, a 14-year veteran of McKesson, advanced to chairman and CEO.

By 1990 McKesson was the industry leader in the drug wholesaling business. Its 27 percent market share was twice the percentage of its main competitor, Bergen Brunswig. McKesson in 1990 sold about 120,000 different products ranging from over-the-counter medicines to prescription drugs. Its customers included 2,500 hospitals, 14,000 independent drugstores, and 3,000 chain stores. Its annual sales of $7.6 billion and profits of $106 million came from the hard work of 15,800 employees.

Expansion and Changes in the 1990s and the New Millennium

Ironically, after causing such an uproar in the late 1980s, PCS evolved into a vital segment of McKesson’s business in the early 1990s. During that time, PCS recorded sales and earnings increases of 50 percent annually, and although the company only contributed 2 percent of McKesson’s annual sales, it brought in 20 percent of its profits. The parent company moved to transform PCS into what Business Week called “a full-fledged medical-services-management company” through the early 1994 acquisition of Integrated Medical Systems Inc., an electronic network designed to connect doctors, hospitals, medical laboratories, and pharmacies. Although these two acquisitions improved McKesson’s operations, they also attracted the attention of an increasingly acquisitive pharmaceutical industry. In 1993, Merck & Co., then the world’s largest ethical drug company, or producer of doctor-prescribed drugs, bought Medco Containment, a rival drug distributor, for $6.6 billion.

Merck’s move prompted speculation that PCS and parent McKesson were the next logical takeover targets. McKesson’s stock increased by more than 40 percent from July 1993 (when the Medco deal was announced) to February 1994. To a limited extent, that speculation became reality later that year, when McKesson agreed to sell PCS to Eli Lilly & Co. for $4 billion in cash.

McKesson used the sale as an opportunity to restructure its finances: The company gave shareholders $76 plus a new share in McKesson in exchange for each old McKesson share they held. The remaining $600 million in proceeds from the sale were reinvested in the company.

CEO Seelenfreund looked to McKesson’s future in the company’s annual report for 1993. He noted, “In the competitive environment created by efforts to bring rising healthcare costs under control, the winners will be those organizations that have both the financial strength and the technological skills needed to improve the quality of care while cutting their own costs and those of their customers. McKesson is one of the few companies that possess both these strengths.”

McKesson’s expansion in the 1990s was fueled by several acquisitions. On November 17, 1998, it announced the acquisition of Red Line HealthCare Corporation, a Novartis subsidiary whose headquarters remained in Golden Valley, Minnesota. A distributor of medical services and supplies for extended care facilities, Red Line (www.redline.com) reported sales of about $375 million for the fiscal year that ended on August 31, 1998.

In January 1999 McKesson through a subsidiary completed its merger with HBO & Company (NASDAQ: HBOC) to form McKesson HBOC, Inc. The merged business that began operations on January 13, 1999 was “the world’s largest healthcare services company,” according to a press release.

In 1999 McKesson HBOC acquired two other companies. First it acquired Kelly/Waldron & Company and Kelly Waldron/Technologies Solutions, which provided market research, database services, and automated systems to help strengthen the corporation’s sales and marketing efforts. The two acquired businesses had revenue of about $25 million in 1998. Later in 1999 McKesson acquired the Minneapolis company of Abaton.com, Inc., a private firm that offered Internet based prescribing, laboratory requests and results, and related services to doctors’ offices.

Prospective Health, Inc. (PHI)’s acquisition by McKesson HBOC was announced in a press release dated January 31, 2000. Headquartered in Palos Heights, Illinois, PHI and its 50 employees developed software for the healthcare industry.

About a month later, on February 29, 2000, McKesson announced the sale of subsidiary McKesson Water Products Company to Groupe Danone for $1.1 billion in cash. That was the final step that began in the 1980s to end the company’s diverse operations. “This sale completes the company’s transition to a focused healthcare company, with market-leading positions in healthcare information technology and supply management,” said John H. Hammergren and David L. Mahoney, company co-CEOs and co-residents, in a February 29, 2000 announcement.

At the end of fiscal 2000, which ended March 31, 2000, McKesson HBOC reported total revenues of $36.7 billion, a 22.3 percent increase over its $30.0 billion in total revenues for fiscal 1999. The corporation’s fiscal year 2000 total revenues came from four sources: 1) pharmaceutical distribution and services, $24.1 billion, 2) medical-surgical distribution, $2.7 billion, 3) $8.7 billion in sales to customers’ warehouses, and 4) information technology, $1.2 billion. Including special items, the company in fiscal 2000 earned a net income of $723.7 million, up from $84.9 million the year before.

The company on July 24, 2000 announced it had signed a three-year contract with Wal-Mart Stores to continue providing pharmaceuticals for the chain of 1,773 Wal-Mart stores, 780 Supercenters, 466 SAM’S Clubs, and five Wal-Mart warehouses. A Wal-Mart executive praised McKesson for its innovative service and technological prowess that led to the renewal of a business relationship that began in 1989.

In September 2000 McKesson HBOC Information Technology Business signed an agreement to acquire the MED-Solution system of Montgomery, Alabama’s Health Care Systems, Inc. This was part of the company’s efforts to improve the reliability and safety of drug dispensing in hospitals and other institutions. Through its automated systems, the company planned to ensure that the right patients received the right medications at the right times. Adverse drug events that led to deaths and suffering were a major problem according to the Institute of Medicine’s 1999 study called To Err Is Human: Building a Safer Health System.

In early December 2000 McKesson HBOC’s Clinical and Biological Services announced a strategic alliance with DHP Ltd., an Abergavenny, United Kingdom clinical trial supplies company (www.dhpclin.com). This agreement resulted from increased globalization of the pharmaceutical and biotechnology industries that both companies served.

McKesson in late 2001 announced another expansion of its U.K. operations. In 1990 its Information Solutions business had started in the United Kingdom, but in 2001 it signed a $480 million ten-year contract to provide automated human resources and payroll systems to the government’s National Health Service Information Authority. Such agreements helped McKesson look forward to a prosperous future, both in its home country and overseas.

Principal Subsidiaries

Millbrook Distribution Services Co.; Armor All Products Corp.; McKesson Service Merchandising Co.; Medis Health & Pharmaceutical Services Inc. (Canada); Zee Medical, Inc.; McKesson HBOC Pharmaceutical; McKesson HBOC Automated HLTCR; McKesson HBOC Medical Group; McKesson Healthcare Del Sys; McKesson Drug Co.; McKesson HBOC Health Systems; McKesson HBOC Corporate SLTNS; McKesson Aps; McKesson Bioservices; McKesson Pharmacy Systems; McKesson HBOC Extended Care; Med Management.

Principal Competitors

Cardinal Health, Inc.; AmerisourceBergen Corporation.

Further Reading

Byrne, Harlan S., “McKesson Corp.: Big Drug Distributor Bounces Back from a Bummer Year,” Barrons, June 25, 1990, pp. 51–52.

Hof, Robert, “McKesson Dumps Another Asset: The Boss,” Business Week, September 25, 1989, p. 47.

Johnston, Russell, “Beyond Vertical Integration: The Rise of the Value-Adding Partnership,” Harvard Business Review, July/ August 1988, pp. 94–101.

Mitchell, Russell, and Joseph Weber, “And the Next Juicy Plum May Be McKesson?,” Business Week, February 28, 1994, p. 36.

Moskowitz, Milton, Robert Levering, and Michael Katz, editors, “McKesson,” in Everybody’s Business: A Field Guide to the 400 Leading Companies in America, New York: Doubleday/Currency, 1990, pp. 228–30.

Schlax, Julie, “Strategies: A Good Reason to Mess with Success,” Forbes, September 19, 1988, pp. 95–96.

—updates: April Dougal Gasbarre, David M. Walden