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Henry Schein (HSIC)Stock (Medical Equipment Wholesale Industry, Pharma & Healthcare Industry)
 Henry Schein (NASDAQ: HSIC) is a leading distributor of medical, dental and veterinary supplies to domestic and international practitioners. The company has grown significantly over the past 10 years by acquiring many smaller distributors. Their large network of distribution centers has allowed the company to undercut the prices of smaller local and regional competitors. Henry Schein income has grown steadily, amounting to a 68% increase in net income over the last 5 years and a current market cap of over $3 billion. Growing healthcare expenditures have been positively affecting Henry Schein's business. These growing expenditures result from an aging demographic and societal focus on increasing coverage. However, managed care and group purchasing agreements threaten to squeeze margins on healthcare distributors. With tough competition from names like Patterson Companies (PDCO) , Henry Schein may find itself in the midst of a price war.
[edit] Business OverviewHenry Schein, based in Melville, New York, and currently employs about 11,000 workers. It was founded in 1932, and had its $72.8 million initial public offering in 1995. Since then, it has been aggressively acquiring smaller distributors to profit from more regional consolidation. These acquisitions helped Henry Schein grow its business tremendously, with a compounded annual growth rate in sales of 21% and compounded annual growth in net income of 31% between 1995 and 2007. In 2005, Henry Schein joined the Fortune 500. Henry Schein's primary business is distributing supplies and equipment to medical, dental, and veterinarian healthcare practitioners. It buys the products in bulk from manufactures, stores them in regional distribution centers, and then fills and ships orders to local practitioners. There are nine distribution centers located in North America and three in Europe. Henry Schein also provides support and technological services to many of these practitioners. [edit] Financial and Business MetricsExcept for the year 2004, sales, operating income, and net income have shown strong growth. Net income grew an average 16.8% per year; operating income grew an average of 17.0% per year; and net income growing an average of 19.2% per year. With all these growth rates in the double digits, Henry Schein has had a strong record of growth over the last few years. Because of recent trends towards managed care and group purchasing agreements (discussed below), there are worries that profit margins will shrink. However, data from the last few years shows no such trend; profit margins have actually widened over the last two years.
Henry Schein's customer base has stayed relatively steady over the last three years. Only the international segment has expanded significantly as a result of the acquisitions of companies in Canada, Great Britain, New Zealand, Australia, Germany, and Switzerland.
[edit] Healthcare Distribution (98% of sales, 94% of net income, 28% gross profit margin)Henry Schein distributes healthcare products to office-based healthcare practitioners who lack the ability to store and manage large quantities of supplies. Henry Schein’s large regional warehouses allow them to rapidly and reliably fill the often small orders from practitioners. Distributed products include consumable products, small equipment, laboratory products, large dental and medical equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins. Henry Schein also offers equipment repair services that are included in its healthcare distribution segment. Henry Schein's dental group is company's largest group, serving approximately 85% of the estimated 136,000 office-based dental practices in the combined United States and Canadian dental market, with an estimated 40% market share in 2007. The medical group serves approximately 45% of the estimated 250,000 office-based physician practices. Henry Schein also serve over 75% of the estimated 27,000 animal health clinics in the United States, with an estimated 17% market share in 2007. Finally, the international group serves approximately 240,000 practices in 18 countries outside of North America, with an estimated 17% market share in medical and animal health markets in 2007.[6] [edit] Technology (2% of sales, 6% of net income, 74% gross profit margin)Henry Schein sells software systems to its customers that provide practitioners with patient treatment history, billing, accounts receivable analyses and management, appointment calendars, electronic claims processing and word processing programs. As of last year, the user base was over 52,000 practices. Henry Schein also offers financial services to its clients.[7] [edit] Trends and Forces[edit] Higher healthcare expenditures benefit distributors In general, trends or forces that increase healthcare spending are positive for the healthcare distribution industry. More healthcare spending means there are more products and equipment that need to be distributed, resulting in higher revenues for Henry Schein and other distributors. Currently, healthcare expenditures are growing rapidly. [edit] Older populations spend more on healthcareAn older population benefits the distribution industry, because the elderly spend more on healthcare. With the aging of the baby boomer generation, the demographics of the United States is steadily shifting towards an older population. The oldest old are the fastest growing segment of the elderly population; the population aged 85 and older is projected to triple to about 14 million by 2040. The population aged 65 to 84 is projected to double in the same time period. [9] [edit] Increasing healthcare awareness increases healthcare expendituresAs many citizens of the developed world push for universal healthcare coverage, healthcare expenditures may continue growing at their rapid pace. Already, the United States directly covers 27.8% [10] of the population through government programs. Statewide universal healthcare has been implemented in Massachusetts and is being considered in California, Connecticut, Maine, Vermont and Hawaii. Additionally, cosmetic surgery and elective procedure markets continue to grow. Healthcare spending is projected to reach $4.1 trillion by 2016, about 20% of GDP. [11] [edit] Managed care is a mixed bagWith the United States spending a higher percentage of GDP on healthcare than any other developed nation, there has been much talk of cost containment. There is a growing trend towards HMOs, group practices, and other managed care accounts and collective buying groups. These accounts emphasis competitive prices and may shrink profit margins in the distribution industry. With tough competition from the likes of Patterson Companies (PDCO), Henry Schein might end up in a detrimental price war. Also, large buying groups may displace some of the warehousing and supply management services that distributors provide. However, Henry Schein may benefit from a trend towards managed care, because these clients will need larger orders and more technological support. [edit] Competition
Although Cardinal Health, McKesson, and ABC also distibute healthcare products, Henry Schein's major competitor is Patterson Companies (PDCO) , the only other nationwide distributor of dental products. Although Patterson Companies (PDCO) has a 32% dental distribution market share compared to Henry Schein's 30%, it is a much smaller company, with about half the net sales of Henry Schein. [12] With its large medical and international sales, Henry Schein is more diversified. With the trend towards managed care and group purchasing agreements, Henry Schein's diversification into medical distribution may be a strong competitive edge. Regardless, the two companies may compete more heavily on price in the future as clients become more organized.
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