Office-based practitioners, such as dentists, physicians and veterinarians, are in need of equipment that can help increase productivity, efficiency and profitability.
Manufacturing conglomerate Danaher makes a digital X-ray for dentists, and Milestone Scientific makes computer-controlled local anesthetic delivery systems.
New technology improvements, such as 3-D X-rays, electronic medical records, digitalized dental impressions and management software, are crucial to the productivity of office-based practitioners.
However, high-tech equipment doesn't just waltz into an office by itself, and that's where Henry Schein comes in.
The Melville, N.Y.-based company (NasdaqGS:HSIC - News) is the largest distributor of health care products and services to office-based practitioners in the combined North American and European markets. That includes private-practice dentists, physicians and veterinarians.
Schein's main focus is to help these private practitioners run a better business so they can provide better clinical care, says the company's chief executive, Stanley Bergman.
The company has a number of exclusive distribution relationships with firms -- such as Danaher (NYSE:DHR - News) and the world's largest oral care company, Colgate (NYSE:CL - News) -- that make dental and medical consumables as well as capital equipment, Bergman says.
Schein's system for selling supplies is a hybrid of direct mail, telesales and field sales that drive demand for the thousands of products delivered through an efficient distribution network, he says.
Schein has five distribution centers in the U.S., two in Canada and a similar number in Western Europe. Bergman says the distribution centers are expensive to establish, but once up and running, they have a relatively fixed-cost infrastructure that is highly efficient.
"The more volume you pump through that fixed-cost infrastructure, the greater the operating margins," Bergman told IBD.
Dental Group
Schein's dental group in aggregate accounts for roughly 65% of the company's total business. Its core North American dental group made up nearly 40% of total sales in the third quarter.
This segment is benefiting from improvements made throughout the dental care industry, including new technology and demographics, says analyst Jeff Johnson of Robert W. Baird.
"The dental market is currently being driven by a number of positive demographic factors, including an increasing worldwide population and the aging baby boomer generation," Johnson said.
"The (industry) is also benefiting from the longer retention of natural teeth, thus requiring increasing restorative, preventive and cosmetic care."
These factors have increased the focus on office productivity that has driven accelerating dental equipment and higher-end consumable product sales, Johnson says. And Schein has reaped the benefits.
In the third quarter, earnings swelled 50% to 66 cents a share on revenue of $1.51 billion, up 21%. Analysts polled by Thomson Financial expected 62 cents.
Schein's CFO, Steven Paladino, told IBD the company has delivered a compounded annual growth rate of 18% at the earnings level from 1995, the year it went public, through 2006.
Dental group sales rose 15%, with dental consumables up 10% and equipment and service revenue jumping 26%.
The company holds an estimated 34% share of the $6.4 billion North American dental distribution market, which is essentially in line with that of its main competitor, Patterson Cos. (NasdaqGS:PDCO - News), Johnson says.
Its medical group, driven by the same need for capital equipment that can boost productivity, saw sales grow 25% on higher influenza vaccine sales.
But the company reduced its exposure to the flu vaccine market by cutting its commitment to 15.5 million doses in 2007 and 12 million to 15 million in 2008 vs. prior estimates for 20 million doses.
"Historically, we sold flu vaccines to physicians, but we also provided products to other distributors and we wholesaled the product. We're exiting the wholesaling," Bergman said. "This helps reduce volatility while increasing visibility."
The company was able to maintain its 2007 earnings guidance of $2.53 to $2.57 a share, Paladino says. Schein also expects 2008 profit to grow to $2.93 to $3, the CFO says. Those forecasts are in line with the Street's estimates.
Bergman says its most exciting segment is its technology unit, which he expects will drive profit.
The segment saw sales increase nearly 30% in the third quarter. However, the unit accounted for just about 2% of total revenue last year. It sells software practice management systems and electronic medical records to the dental, medical and veterinary arenas.
"Technology, such as software practice management systems and electronic records, allows for increased productivity in the office and also increased cash flow," Bergman said.
In total, Schein's dental, vet and medical practice management software is used in more than 50,000 practices worldwide.
Schein's Dentrix Dental Systems and AVImark system for vets are some of the leading products in the space, the CEO says.
The electronic medical records space has a lot of opportunity, as maybe less than 5% of physicians have this software available in their office, Bergman says.
Schein built out its technology offering with the recent acquisition of Software of Excellence, a leading provider of practice management software for dentists in the U.K., Ireland, Australia and New Zealand.
Buyouts
Acquisitions have accounted for a sizeable portion of Schein's growth the last 10 years.
The company has made a dozen buyouts per year the last decade, Bergman says.
The purchases have ranged in size from firms with $20 million in sales to over $300 million in annual revenue.
More than 300 smaller distributors hold about 30% of the U.S. dental market, more than 500 smaller distributors hold roughly 50% of the U.S. medical market and more than 200 smaller distributors hold about 80% of the European dental market.
Even though the highly fragmented dental, medical and veterinary markets serve up acquisition opportunities for Schein, it still faces risks, Johnson says.
"Its growth is partially dependent on acquisitions, and should there be a lack of suitable candidates or an unfavorable economic environment, company growth could slow," Johnson said. "However, there are currently a number of potential acquisition candidates for Schein to look at."
Schein looks for two kinds of acquisitions, Bergman says.
The first is one that will increase the company's penetration in a certain market or takes it into new geographies.
The second type of acquisition will help add to Schein's product offering.
"We do our due diligence to ensure a smooth integration," Bergman said. "And we plan to continue with our (acquisition) strategy."
