The San Francisco, California-based McKesson's second quarter fiscal year 2010 profit dropped 8% from last year, hurt by higher interest and income tax expenses. Yet, I remain positive about the company – why is that so?

Who is McKesson?

In terms of annual revenue, McKesson (MCK) is the number one pharmaceutical distributor in the U.S., Canada, and Mexico; the largest healthcare IT provider, with a customer base of 50% of all U.S. hospitals, including 77% of those with more than 200 beds, and over 100,000 physicians; and the largest distributor of medical-surgical products to physicians and extended care markets.

Short term positives – benefitting from H1N1 flu

I believe that by leveraging its leading position in these markets to enhance "one-stop shopping" and increase cross-selling, the healthcare distribution giant will continue to penetrate its core customer markets and generate revenue and earnings growth above its peers. Separately, I think the recent selection of McKesson to be the sole nationwide distributor of the H1N1 flu virus vaccine by the U.S. Centers for Disease Control gives it some prestige in the competitive drug distribution space. I expect revenue and operating margins to expand at the McKesson Distribution Solutions segment, driven by the company's concentration on the relatively faster-growing, higher-margin products and services in both pharmaceutical and medical-surgical distribution. However, current fiscal year (FY 10 (Mar.)) revenue growth is being slowed mainly by the loss of $3 billion of business on the nonrenewal of two major customer contracts, a negative that should lap in FY 11.

For the fiscal year ending March 2010, the consensus EPS forecast has increased over the past week from $4.474 to $4.539 (1.45%) and increased over the past month from $4.284 to $4.539 (5.95%). Of the 13 analysts making yearly forecasts, 18 raised and none lowered their forecast.

Long term positives, not one but many

Over the long term, I believe segment revenue will benefit from a slew of new specialty drugs, price increases of traditional branded pharmaceuticals, and expected strengthening performance on fee-for-service contracts with drug makers, partly offset by the rise in volumes of low-priced generic drugs as a percentage of sales. Other revenue growth drivers I see include increasing enrollment in the Medicare Prescription Drug Program, and my view that healthcare reform, whose final form is uncertain, will help increase prescription volumes. I also expect margins to continue to improve on cost controls and as generic drugs, which are more profitable than specialty and traditional branded drugs, further penetrate the sales mix.