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The Hub of American Health Care

By Rob Fannon, editor Phase 1 Investor
Friday, April 4, 2008

It's no secret America's health care system has problems.
 
As I wrote last week, tens of thousands of people die unnecessarily every year due to medical errors... many of which could be prevented if hospitals and doctors adopted technology to track prescriptions and handle health care records.
 
I also told you last week that I'd give you the name of one of my favorite players in health care IT, a company benefiting as medical providers finally realize they can save billions in the long run with efficient software systems...
 
This company provides the software to streamline simple tasks – like writing prescriptions and ordering supplies – to 20% of U.S. doctors and 75% of the country's large hospitals. Its IT infrastructure is connected to 90% of all retail pharmacies and more than 1,800 insurance companies. Its software gets 3.7 million log-ons per month. And it's expanding overseas, with customers in Canada, UK, France, the Netherlands, Australia, New Zealand, Puerto Rico, and Israel.
 
Health care information technology is a $25 billion growth industry, and McKesson Corporation (MCK) is its 800-pound gorilla.
 
McKesson provides hardware, software, and consulting focused on improving the quality of care while reducing costs for its hospital, pharmacy, physician, and insurance customers. Over the years, McKesson has used a combination of large R&D investments and shrewd acquisitions to cement its position as the top player in the health care IT industry.
 
McKesson is not only the largest health care IT company but also one of the most loved by its customers. The leading independent health care IT research firm, KLAS, ranked nine of McKesson's solutions either as the best or as a category leader in its 2006 report.
 
McKesson's health care IT segment is growing around 20% per year. And is one of its most profitable, as well. Despite bringing in only 1.9% of the company's $88 billion in revenue last year, the IT segment is providing 9.5% of the company's total operating income.
 
I like to call McKesson the "hub of American health care." It's the biggest player in the health care IT industry, but its main business is drug distribution – shuffling drugs from manufacturer to consumer. Every night, McKesson distributes more than 1.5 million drugs and medical products to more than 75,000 different sites, everywhere from Wal-Mart to the Department of Veterans Affairs. In the process, it rings up nearly $2 billion in sales per week.
 
But here's the best part about owning this health care giant: McKesson has consistently positioned itself as the leader in every new and lucrative medical business... the latest of which is health care IT. Without McKesson, the health care system as we know it would collapse. So this is this is a stock you'll never have to sell.
 
Good investing,
 
Rob Fannon




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