Fitch Upgrades McKesson's IDR to 'BBB+'; Affirms Short-Term Ratings; Outlook Stable.

CHICAGO -- Fitch Ratings has upgraded the ratings for McKesson (NYSE:MCK) as follows:

--Issuer default rating (IDR) to 'BBB+' from 'BBB';

--Senior unsecured credit facility to 'BBB+' from 'BBB';

--Senior unsecured debt to 'BBB+' from 'BBB'.

In addition, Fitch affirms the following ratings:

--Short-term IDR 'F2';

--Commercial Paper 'F2'.

The ratings apply to approximately $988 million of debt. The Rating Outlook is Stable.

Fitch's rating action is the result of MCK's improving financial performance, decreased leverage and less uncertainty regarding the ultimate resolution of the proposed $1.2 billion shareholder class action lawsuit.

MCK made a strategic decision to sell the acute-care segment of its medical-surgical distribution business. This segment has underperformed for a number of years. MCK will now focus on the better performing alternate-site segment of the business, where the company continues to demonstrate operational strength.

During the past two years, MCK improved its financial profile by stabilizing margins, reducing leverage, and increasing cash levels. In part, MCK's performance is attributable to its successful transition to a fee-for-service (FFS) business model, which requires less branded-drug inventory and involves less seasonal volatility in margins. An increasing sales mix of generic drugs has also aided margins.

The company continues to exercise discipline with acquisitions, focusing on targets that operate within areas of MCK's core competencies. Fitch expects MCK will continue with this strategy, financing targeted acquisitions with cash on hand and free cash flow. Larger acquisitions would likely require issuances of debt or equity.

At June 30, 2006, MCK had approximately $2.0 billion in cash and short-term investments, $1.3 billion availability under its bank facility, and $700 million availability on its receivables facility. MCK has approximately $385 million in debt maturing through 2011. At June 30, 2006, latest 12 months (LTM) interest coverage (EBITDA/interest) was 14.8 times (x) and leverage (total debt/EBITDA) was 0.73x or (adjusted debt/FFO) was 0.98x.

MCK is the largest pharmaceutical distribution company in the United States. The company and its two main competitors (Cardinal Health Inc. and AmerisourceBergen) account for approximately 90% of the U.S. market. The company also distributes medical-surgical supplies and provides technological solutions for health care providers.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.