DBRS Confirms McKesson at A (low), R-1 (low)

DBRS has today confirmed the ratings on McKesson Corporation’s (McKesson or the Company) Senior Unsecured Debt and Commercial Paper at A (low) and R-1 (low), respectively. The trends are Stable. The ratings primarily reflect McKesson’s position as the largest distributor of pharmaceutical and health-care products in North America and its solid financial profile. The confirmation follows the completion of the Company’s acquisition of US Oncology Inc. (US Oncology) and the upgrade of the Company’s Senior Unsecured Debt rating in December 2009.

The impact of the recent US Oncology acquisition (for approximately $2.2 billion, including the assumption of roughly $1.6 billion in debt) is modestly negative on McKesson’s financial profile. However, the investment is consistent with the Company’s strategy of expanding its specialty services business with a focus on the higher-growth oncology sector (see the DBRS press release dated November 1, 2010). The Company’s debt-to-capital ratio will increase but is expected to remain within its targeted 30% to 40% range. McKesson’s strong cash position (over $3 billion at September 30, 2010) and the favourable outlook for operating results help to mitigate the impact of higher debt related to the acquisition.

DBRS expects the Company’s ratings to remain stable over the near to medium term. Earnings and cash flow have consistently improved and this trend is likely to continue. While organic growth will remain modest, increased contributions from higher-margin generics, Technology Solutions sales, global sourcing synergies, and acquisitions should remain key earnings drivers. McKesson is expected to maintain its leading market position (number one in the United States and Canada) in the pharmaceutical distribution industry, which also benefits profitability.

DBRS notes that the Company remains acquisitive and share repurchase activity could continue (close to $1.4 billion (net) in shares were repurchased in H1 F2011). Future share repurchases and/or funds required for acquisitions are likely to exceed free cash flow over the near term, and lead to a reduction in cash or increase in debt. In the event of weaker-than-expected operating results, these initiatives would pose considerable risks to McKesson’s financial profile. However, DBRS expects that future shareholder-friendly activity (which includes the recent increase in the dividend) will be manageable at the current short- and long-term rating levels. The Company is likely to continue to generate solid free cash flow, which reduces future requirements for cash and/or debt. In addition, the Company is committed to maintaining a solid balance sheet and has the flexibility to remain within its aforementioned target leverage range.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.