Henry Schein 2003 Annual Report Download - page 21

Industry Overview
In recent years, the healthcare industry has increasingly focused on cost containment. This trend has benefited distributors capable of
providing a broad array of products and services at low prices. This trend has also accelerated the growth of HMOs, group practices,
other managed care accounts and collective buying groups which, in addition to their emphasis on obtaining products at low prices, tend
to favor distributors capable of providing specialized management information support. We believe that the trend towards cost
containment has the potential to favorably impact demand for practice management systems and software that can enhance the efficiency
and facilitation of practice management.
Our operating results in recent years have been significantly impacted by strategies and transactions we undertook to expand our
business, both domestically and internationally, in part, to address significant changes in the healthcare industry, including consolidation
of healthcare distribution companies, potential healthcare reform, trends toward managed care, cuts in Medicare and collective
purchasing arrangements.
Industry Consolidation
The office-based healthcare practitioner industry, in the geographic markets in which we operate, is highly fragmented and diverse.
Encompassing the dental, medical and veterinary markets, this industry accounted for revenues of approximately $17 billion in 2003. The
industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations comprised of
between a few and a large number of practitioners who have combined or otherwise associated their practices.
Due in part to the inability of office-based healthcare practitioners to store and manage large quantities of supplies in their offices, the
distribution of healthcare supplies and small equipment to office-based healthcare practitioners has traditionally been characterized by
frequent, small quantity orders, and a need for rapid, reliable and substantially complete order fulfillment. The purchasing decision within
an office-based healthcare practice is typically made by the practitioner or an administrative assistant, and supplies and small equipment
are generally purchased from more than one distributor with one generally serving as the primary supplier.
We believe that consolidation within the supply industry serving office-based healthcare practitioners will continue to result in a number
of distributors, particularly companies with limited financial and marketing resources, seeking to combine with larger companies that can
provide opportunities for growth. This consolidation may also continue to result in distributors seeking to acquire companies that can
enhance their current product offerings and expand the services they can offer or provide opportunities to serve a broader customer base.
Our trend with regard to acquisitions has been to expand our role as a provider of products to the healthcare industry. This trend has
resulted in expansion into service areas, which (a) complement our existing operations, and (b) provide opportunities for us to develop
synergies with, and thus strengthen, the acquired businesses.
We are currently awaiting regulatory approval for the acquisition of demedis, a leading full-service distributor of dental consumables and
equipment in Germany, Austria, and the Benelux countries, and EDH, which includes KRUGG S.p.A., Italy's leading distributor of dental
consumable products and DentalMV GmbH (otherwise know as Muller & Weygandt), one of Europe's leading direct marketing distributors
of dental consumable products. These acquisitions will approximately double the net sales of our international operations (see Note 7 to
our consolidated financial statements). Additionally, we have completed 22 acquisitions in the past five years, including 8 in 2003.
As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we have the ability to
support increased sales through our existing infrastructure. In the U.S. dental market, we estimate that there are currently over 300 smaller
distributors holding approximately 40% of the market. In the U.S. medical market, we estimate that over 500 smaller distributors hold
approximately 60% of the market, and in the European dental market, we estimate that over 200 competitors hold approximately 80% of
the market.
As the healthcare industry continues to change, we continually evaluate possible candidates for merger or acquisition and intend to
continue to seek opportunities to expand our role as a provider of products and services to the healthcare industry. There can be no
assurance that we will be able to successfully pursue any such opportunity or consummate any such transaction, if pursued. If additional
transactions are entered into or consummated, we would incur additional merger and acquisition related costs, and there can be no
assurance that the integration efforts associated with any such transaction would be successful.
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