Owens and Minor (NYSE: OMI) distributes disposable medical supplies such as gloves, needles, syringes to acute care units in hospitals. 95% of the company's $6.8 billion revenue in 2007 came from the sale of these products. O&M differentiates itself from other medical supply distributors by offering complementary supply-chain management and consulting services for hospital customers. These services have successfully increased the number of customers O&M serves by 10% this past year, from approximately 4,100 hospitals in 2006 to approximately 4,500 hospitals in 2007. The company's share of the US market for medical supplies distribution has also grown to 28% this past year.
As part of its national plan for expansion, O&M entered the direct-to-consumer (DTC) supply business in January 2005, acquiring seven DTC distributors for a total of $22.7 million while also growing its private-label product line. On September 30, 2006, O&M acquired the direct-to-consumer distributor McKesson Medical-Surgical Inc., a business unit of McKesson (MCK), for $152.1 million. As a result of these acquisitions, O&M saw a 22.9% increase in revenue to $6.8 billion in 2007 from $5.5 billion in 2006. However, profitability decreased seeing as how operating earnings were impacted by the $26 million cost of integrating the business of McKesson Medical-Surgical Inc. On October 1, 2008, Owens and Minor also completed the acquisition of the Burrows Company, a privately held, Chicago-based DTC distributor of medical goods.
Owens and Minor's greatest challenges come from its expansion into the DTC supply business as well as contractual limitations with its customers. O&M's expansion into the DTC supply business has led to an 11% increase in the company's expenses over the past three years. The complexities and the binding nature of contracts in the medical distribution business, especially with large customers, forces Owens and Minor to incur greater costs on itself. This is exacerbated by the fact that Owens and Minor relies heavily on a limited number of customers. In 2007, the company's top three contracts accounted for approximately 70% of O&M's revenue.
Approximately 95% of Owens and Minor's revenue comes from the distribution of consumable goods such as disposable gloves, needles, syringes, and other surgical and medical supplies. O&M conducts its business with group purchasing organizations (GPOs) and integrated health networks (IHNs). GPOs and IHN's both act on behalf of groups of healthcare providers to obtain better pricing than is available to individual providers.
As of 2005, Owens and Minor has also expanded into the highly fragmented direct-to-consumer (DTC) diabetic supply market. O&M differentiates itself from other medical supply distributors by offering complementary supply-chain management and consulting services for hospital customers. 
In FY 2007, O&M increased revenue by 22.9% to $6.8 billion from $5.5 billion the previous year. Similarly, net income increased by 50% to $72.7 million in 2007 from $48.8 million in 2006. Operating earnings grew as well in 2007 to $143.2 million as compared to $102.8 million in 2006; however, earnings would have been greater if not for the $26 million costs incurred integrating McKesson Medical-Surgical Inc. 
|Interest Expense, Net||22.9||13.3||11.9|
|Cost of revenue||6.085||4,936||4,306|
|Depreciation and amortization||31.8||25.7||18.4|
|Other operating income and expense, net||(5.3)||(3.7)||(1.1)|
As of 2007, 70% of Owens and Minor's revenue can be attributed to three GPO contracts with Novation, Broadlane, and Premier. These three GPO's represent over 4500 hospitals and approximately 2600 sub-acute care facilities.
95% of Owens and Minor's revenue comes from its distribution of medical and surgical supplies. O&M also provides its customers with a number of free management and consulting services that range from inventory management to logistics and clinical consulting. Examples of these services include:
These services have successfully increased the number of customers O&M serves by 10% over the past year to approximately 4,500 hospitals from approximately 4,100 hospitals the previous year.
O&M's gross margin as a percentage of revenue for 2007 decreased to 10.51% from 10.78% in 2006 and 10.70% in 2005 as a result of contractual limitations with GPOs. This decrease coincides with the end of Premier's contract in 2008 along with the maturation of Novation's and Broadlane's contracts. After the pricing of a contract is determined between a supplier and a purchaser in the medical distribution business, the two parties settle on a cost-plus fee with the distributor. This fixed-percentage distribution fee normally remains constant over the designated term of a contract, limiting O&M's ability to pass up rising costs onto customers.  As contracts mature and costs rise, the supplier incurs a greater cost on itself and its gross margin decreases, as seen in the cases of Premier, Novation, and Broadlane.
Owens and Minor relies heavily on a limited number of customers. In 2007, the company's top three GPOs contracts accounted for approximately 70% of O&M's revenue. O&M is a distributor for Novation, a GPO which represents the purchasing interests of more than 2,500 healthcare organizations and accounts for approximately 40% of the company's revenue in 2007. O&M is also a distributor for Premier who represents more than 1,500 hospitals and accounts for 19% of the company's revenue in 2007. O&M's third largest contract is with Broadlane, a GPO representing over 900 acute-care hospitals and more than 2,600 sub-acute-care facilities. Broadlane accounted for 12% of O&M's revenue in both 2007 and 2006. This dependence has limited Owens and Minor's bargaining options in regards to contracts for fear of losing a key customer.
Since Owens and Minor's expansion into the DTC supply business in 2005, the company's expenses have grown by 11%, and its operating earnings have subsequently decreased by 14% through 2007. These figures have not kept pace with the rate of revenue growth over the past three years. With an increasing number of deliveries in the DTC business combined with increases in oil and gas prices, OMI saw its general and selling expenses increase by $73.3 million in 2007 -- a consistent trend since 2005.
Owens & Minor differentiates itself by providing its clients with supply-chain management and consulting services. Also, with the development of its private-label product, Owens and Minor has been able to decrease dependence on large suppliers, like Covidien Ltd. (COV) and Johnson and Johnson. This past year, sales of products of Covidien Ltd. (COV) and JOHNSON & JOHNSON (JNJ) accounted for approximately 13% and 11%, respectively, of the company’s revenue. Owens and Minor's private-label products range from diagnostic systems to nursing and patient equipment/apparel, products previously obtained from Covidien Ltd. (COV) and JOHNSON & JOHNSON (JNJ).
|||2007 Total Revenue (In millions)||% Revenue Growth in 2007||2007 Net Profit Margin|
|Owens and Minor||$6,800||22.9%||1.07%|
|Cardinal Health ||$86,800.00||12%||1.44%|
|MedLine Industries ||$2,810||15%||Not Available|
|Baxter International ||$11,263.00||9%||15.16%|