Morningstar | Henry Schein Faces Dental Market Headwinds Amid Restructuring Efforts
From our perspective, Henry Schein's position as a major supplier to dental practices has deteriorated over the last few years, as competition within the dental consumable segment has increased significantly. What has ensued for Schein has been inconsistent growth and pressured profits. From what we can gather, the increased competition has emanated from new online-based wholesale players that can source consumables from the cheapest suppliers nationwide. We believe this pressure will last a material amount of time as established online wholesalers will continue to take share, and we have seen evidence that new entrants are poised to move into this market niche. We expect headwinds from the increasing concentration of corporate dentistry buyers to further magnify this pricing pressure.While we believe the competitive environment has tightened, Schein still possesses a solid distribution network it can leverage. However, in order to maintain the relevance of this distribution network, the firm has implemented a major restructuring of its sales and wholesaling operations. This strategy includes migrating away from a legacy model that required dedicated sales staff to each of its dental customers and toward a more automated service offering. From our perspective, this is the correct course and should help Schein work through its current issues. Buoying Schein's operations is its private label and specialty dental businesses. We expect the company's animal health spinoff proceeds to be allocated to these segments. Meanwhile, the firm's equipment distribution and installation expertise helps protect the firm from being completely displaced, and many dental customers are reliant upon Schein for many of their capital equipment maintenance needs. We believe these dynamics will offset some of the issues the firm is facing within its consumable operations, but we ultimately contend that customer loyalty will remain marginal in the years to come.Schein (Henry) provides health care products and services to office-based dental and medical practitioners. The health care distribution segment distributes consumable products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins. The company's technology group offerings include practice management software systems for dental and medical practitioners. The company's practice solutions include financial services on a non-recourse basis, e-services, practice technology, network and hardware services, and continuing education services for practitioners.
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