Henry Schein, Inc. Business Information, Profile, and History

Company Perspectives:

The company's mission is to be the worldwide leader in providing the best quality and value in products and services for our healthcare customers.

History of Henry Schein, Inc.

Henry Schein, Inc., is the largest distributor of health care products and services to office-based health care practitioners, mostly in the markets of North America, Europe, New Zealand, and Australia. These health care customers include physician practices, dental practices and laboratories, veterinary clinics, and government and other institutions. Henry Schein performs its operations through four groups: Medical, Dental, International, and Technology. Its dental and medical products are categorized into: medical products; consumable dental products and equipment; large dental equipment; dental laboratory products; and veterinary products. Technology products are divided into software and related products including Henry Schein's practice management software products. These products are offered under the Company's brand names including Henry Schein, AVImark, Dentrix, ProRepair, Easy Dental, and Digital Dental Office.

Origins

Henry Schein, a pharmacist, and his wife Esther founded the eponymous company in 1932 as a corner drugstore in the Woodside community of New York City's borough of Queens. By the 1950s Schein had also began offering supplies to doctors via a mail order catalog. In 1962 Schein moved the store to a larger location in Flushing, Queens.

Controversy characterized the mid-1960s. In 1964 a federal prosecutor filed a criminal complaint against Schein, who was charged with selling bottles containing counterfeit Dexedrine capsules to three out-of-state pharmacies. Schein also was charged with illegally selling amphetamine, barbiturate, and penicillin tablets to an undercover federal agent.

The mail order operation, which was intended to address a need not met by sales representatives, apparently suffered no such problems. "It was in the 1970s that things really took off," Chief Executive Officer Stanley Bergman told Susan Konig of the New York Times in 1996. "That's when the Schein family discovered the dental market. There were around 3,000 dental distributors back then. But they sold products at relatively high prices and with relatively poor service. So the Scheins decided to put together catalogs which would offer them at lower prices and have them ready for immediate delivery. That was a pretty new concept at the time."

Henry Schein sold his retail store in the mid-1970s to become a full-time distributor of medical and dental supplies and generic drugs. By the late 1970s his company had annual sales of about $40 million. Within a decade, the company was dominant in its field and by 1988 controlled more than 40 percent of the mail order market for dental supplies. The firm moved in 1979 from Queens to a 100,000-square-foot facility in suburban Port Washington, Long Island.

After Schein's son Jacob, a Wall Street attorney, joined the company in 1980, it began automating distribution. In the mid-1980s the firm introduced two interactive methods to enable dentists to file orders for supplies at any time of day or night, either by telephone or computer. It also issued one of the first affinity credit cards and, in 1988, developed a frequent-buyer program at a time when such incentives were confined to airlines.

During this period Schein, which had purchased a Connecticut pill producer in 1970, also became an important manufacturer and distributor of generic drugs. In 1985 it formed a subsidiary, Schein Pharmaceutical, Inc., to serve retail and hospital pharmacies. This company was offering more than 1,500 prescription and over-the-counter drugs and vitamin products through a network of franchised wholesalers. The prescription drugs were being produced for the most part by another Schein subsidiary, Danbury Phamacal Inc., and the over-the-counter drugs and vitamins were being supplied by a number of vendors. In 1992 Schein Holdings, Inc., the parent of Henry Schein, Inc. and Schein Pharmaceutical, spun off the latter as an independent company.

By this time Schein was being run by Bergman, who became chief executive officer after Jacob Schein's premature death from cancer in 1989. Henry Schein had died in 1987. (Esther Schein, who also had been active in management, died in 1992. Jacob's brother Marvin became head of the company's dental equipment division in 1995, after it purchased Schein Dental Equipment Corporation, a separate company that had been founded by Marvin Schein.)

Broadening Scope in the Early 1990s

According to Bergman, Henry Schein was barely profitable when he took charge. "In the early 80's, our competitors started copying us," he recalled to Konig. "They came out with catalogues, they started discounting their products and improving their service, and the bottom line was we started looking just like them. We had to differentiate ourselves again in the dental world, and we did it with value-added services." These services included selling computer products to dentists and offering them financial products.

Another way that Henry Schein differentiated itself from its competitors was to start focusing on European markets in 1990, when it opened its first foreign subsidiary, in The Netherlands. By mid-1991 the company had established three more such foreign operations--in England, Germany, and Spain. It also had begun selling through a distributor to Mexico and it launched its first catalog directed to the Canadian market. Schein was now receiving orders from 70 countries.

In the United States, some 160 telemarketing representatives at Schein's Woodbury, Long Island office, were responding to more than 1.5 million calls a year from doctors, dentists, and veterinarians. Computer-telephone integration, installed in 1992, allowed agents to send a computer profile, simultaneously with the call, to the first available agent. This enabled the company to cut an average of 17 seconds each from incoming calls--a significant saving when considering the volume of calls. By collecting data on the items ordered by a particular account, as well as the frequency of the orders, the profile enabled Schein representatives to anticipate which products the customer might need and to make further suggestions.

Schein's reliance on catalogs and telemarketing rather than salespeople was allowing it to price its products 5 to 10 percent lower than its competitors, according to a securities analyst, but in 1993 the company added 200 field sales consultants to take face-to-face orders from health professionals. In 1996 the company opened a 25,000-square-foot retail outlet near Miami International Airport to cater to the Caribbean and Latin American health care markets. Some 5,000 to 6,000 of its more than 50,000 items were available for purchase on the spot.

Schein's annual sales grew from $236.3 million in 1990 to $415.7 million in 1993. Of this total, the North American Dental Group accounted for 40 percent (and 20 percent of the total U.S. dental supplies market). The Diversified Healthcare Group, established in the 1980s to market products to general practitioners, pediatricians, podiatrists, and other nondentist health care professionals, accounted for almost one-third. The International Group accounted for less than 20 percent of company revenues. The Professional Services Group, Schein's newest division, had developed the leading software package for dental office management and another program for complying with safety regulations. This group also was selling and configuring computer hardware, repairing dental equipment, conducting continuing education, and providing some financial services to dentists.

By late 1994 Schein was selling products in more than 140 countries. The firm also was forming alliances with professional organizations and some other companies. The Diversified Healthcare Group, for example, had taken a 50.1 percent share of Universal Footcare Products Inc., a joint venture with Chicago Medical Equipment Co. to market products to health maintenance organizations and more than 9,500 podiatrists. An agreement with the American Medical Association enabled the group's member physicians to receive discounts on Schein's catalog roster of 18,000 medical supply products. Schein then formed a partnership with the U.S. Army under which it became the prime vendor for the army's more than 100 dental clinics in the United States.

Acquisition-Fueled Growth in the Late 1990s

Schein went public in November 1995, raising $72.5 million from its initial public offering at $16 a share. In July 1996 it raised an additional $124.1 million by selling more stock at $35 a share. Some of the proceeds were used to retire debt, but much of it was reserved for the company's continuing acquisitions program. By the fall of 1996 Schein had acquired 40 regional dental, medical, and veterinarian supply companies over the past five years, including 14 in 1996 alone with combined annual revenue of $100 million. Schein's strategy for integrating its acquisitions--usually made for stock rather than cash--was to deploy a team that spent 10 to 12 weeks evaluating the new company's products and shedding those that did not fit with Schein's own goods, plus integrating the acquired company's customer list with Schein's own and contacting new customers with marketing materials. Schein often retained the acquired firm's sales force but generally eliminated its warehouse operations.

In March 1997 Schein purchased Micro Bio-Medics Inc., a company with $150 million in annual revenues that was expected to double Schein's sales to physicians. Three months later it entered into a joint venture by acquiring a majority interest in the dental division of a regional health care group with operations in Australia and Auckland, New Zealand. In the United States, 65 percent of all dentists and 30 percent of all physicians were Schein customers, according to an investment analyst firm.

Later in 1997 the company, which had ranked second in the U.S. dental distribution industry, became the world's largest distributor of dental equipment and supplies by purchasing the third largest U.S. firm in its field, Sullivan Dental Products Inc., for stock valued at $318 million. Tim Sullivan stayed on as president of the Wisconsin-based company, which was renamed Sullivan-Schein Dental Products Inc. In all, Schein's 24 acquisitions in 1997 had aggregate net sales of about $558.6 million in 1996 and enabled it to reach net sales of $1.52 billion in 1997. The company lost $1 million, however.

In 1998 Schein acquired five more companies. The biggest of these was H. Meer Dental Supply Company, a Michigan-based dental distributor with 1997 sales of about $180 million that was purchased for stock valued at $145.5 million. During the same year, however, Schein sold Marus Dental International, its dental equipment manufacturing operation. In early 1999 the company acquired General Injectibles and Vaccines, Inc., a direct marketer of vaccines and other injectible products with 1998 sales of about $120 million. It also purchased the international dental, medical, and veterinary health care distribution businesses of German-based Heiland Holding GmbH, which had 1998 sales of about $130 million.

Schein had, in 1994, moved its headquarters and telemarketing office to a three-story leased building in Melville, accepting financial and tax incentives from the state of New York, Suffolk County, and Long Island Lighting Company to remain on the island. The company sold its Port Washington warehouse in 1998, with the intention of moving the operation to a larger leased space in Denver, Pennsylvania. Of its eight warehouses, three were in the United States and five in Europe. Schein also was leasing space in nine other countries.

Including its acquisitions, Schein had net sales of $1.92 billion in 1998 and net income of $16.3 million. The dental group accounted for 56 percent of the total; medical, for 27 percent; international, for 12 percent; and the veterinary and technology groups for about equal shares of the remaining 5 percent. Sales under the Henry Schein private label (manufactured by third parties or affiliated HS Pharmaceutical, Inc.) accounted for 8.6 percent of the total. The company's total debt at the end of the year was $209.5 million. In April 1999 Bergman held or controlled more than 15 percent of the stock.

Schein was selling products to more than 75 percent of the estimated 100,000 dental practitioners in the United States in 1998. It distributed more than 12.5 million pieces of direct marketing materials, such as catalogs, flyers, and order stuffers to about 600,000 office-based health care practitioners. The number of its stock-keeping units now exceeded 60,000 in North America and came to about 55,000 in Europe and about 22,000 in Australia. The company also sold more than 28,000 dental practice management software systems, more than any of its competitors. It estimated that about 99 percent of all orders in the United States and Canada received before 7:00 p.m. and 4:00 p.m., respectively, were shipped on the same day the order was received and that about 99 percent were received within two days. The number of its telesales personnel had reached about 700 and its field sales consultants amounted to about 1,100.

Restructuring in the 2000s

Schein announced in August 2000 a restructuring plan targeted to improve customer service, increase profit efficiency, and deal with pending changes in the healthcare industry. The plan included the closing or reduction of specific facilities, and the elimination of about 5 percent of the total workforce. In the fall of 2000, the company sold its half interest in dental anesthetic manufacturer HS Pharmaceutical Inc. The company also finalized the acquisition of one technology business and two healthcare distribution businesses. Henry Schein used four major U.S. distribution centers and over 10 foreign distribution centers to ship over 49 million items as it grew more than 60 percent. In all, Henry Schein posted record sales in 2000, despite the negative impact on its overseas operations of a strong U.S. dollar with respect to the Euro.

In January 2001, the company introduced its new website www.henryschein.com for the use of all of its customers. The company also opened its website www.sullivanschein.com for its office-based dental practitioner customers. After completing its five-year restructuring plan, Henry Schein implemented a three-year strategy plan to improve sales growth, cash flow, and operating margins. As a result, the company posted record financial results. Specifically, medical net sales increased mostly due to improvements in the core physicians' office and alternative care markets. Increases in dental net sales were caused by entry into new markets. Net sales in the international market increased due to improved methods to enter new markets, especially in France, Germany, and the United Kingdom but were offset somewhat by unfavorable international exchange rates to the U.S. dollar. Decreases in net sales in the veterinary market were due to a loss of a product line. Increases in net sales within technology were due to strong sales of products and related services. During the year, Henry Schein completed the acquisition of two healthcare distribution businesses.

The year 2002 was another good year for Henry Schein, mostly due to its wide diversity of products and services, number of markets that it served, and number of geographic areas where it operated. During the year, 43 percent of its revenues came from the Dental Group, 39 percent from the Medical Group, 16 percent from the International Group, and 2 percent from the Technology Group.

During 2003, Henry Schein posted another year of record net sales. As a result, the company debuted on the 2004 Fortune 500 list of largest companies in the United States, being listed at 487. After a four-year departure from major acquisitions, Henry Schein completed several important purchases in 2003, including Colonial Surgical, Hager Dental, Damer & Cartwright, and American Medical Services. The company also began the process of buying three of Europe's leading dental distributors: KRUGG S.p.A., demedis GmbH, and DentalMV GmbH (Muller & Weygandt).

Schein's four groups were all leaders within their particular sectors. Its Medical Group served over 45 percent of the estimated 230,000 U.S. office-based physician practices and had about 16 percent of the estimated $7.1 billion market. It offered over 30,000 products to physicians through three primary brands: Henry Schein Medical, Caligor, and General Injectables and Vaccines (GIV).

The Dental Group had about 30 percent share of the estimated $4.4 billion U.S. and Canadian dental distribution market. The group served over 75 percent of the about 135,000 U.S. and Canadian dental practices, and approximate 15,000 dental laboratories. It is also a major supplier to large group practices, schools, and government and other institutions. The group included Sullivan-Schein Dental in the United States, Henry Schein Arcona in Canada, and the Zahn Dental laboratory supply business.

The International Group had about a 9 percent share of the Western European dental, medical and veterinary markets. It offered more than 75,000 products to 170,000 customers located in 14 countries outside of North America, those countries being Austria, Australia, Belgium, the Czech Republic, France, Germany, Iceland, Ireland, Israel, the Netherlands, New Zealand, Portugal, Spain, and the United Kingdom.

In 2004, Henry Schein expanded its corporate headquarters in Melville, New York; and at the same time increased the number of jobs by 800 at its headquarters and other office locations on Long Island. The company is expected to invest about $30 million for this expansion and renovation.

For over 70 years, Schein had developed unique sales and marketing expertise, a global centralized operating structure, and a broad product offering at competitive prices. In all, the company served medicine professionals in more than 125 countries worldwide and sold about 90,000 products and various services to more than 425,000 global customers. In addition, Henry Schein had an integrated marketing and sales program with more than 1,550 field sales consultants and specialists; about 875 telesales representatives, along with 110 equipment sales and service centers; and more than 550 equipment service technicians. The company also maintained a direct marketing program with more than 31 million materials distributed each year, including such materials as catalogs, flyers, order stuffers, e-mails, and newsletters.

Principal Subsidiaries: Henry Schein UK Holdings Ltd.; Henry Schein Van den Braak, B.V. (Netherlands); Zahn Holdings, Inc.

Principal Operating Units: Dental; Medical; International; Technology and Value Added Services.

Principal Competitors: Allegiance Corporation; Darby Group Companies, Inc.; DENTSPLY International Inc.; Owens & Minor Inc.; Patterson Companies, Inc.; World Med Inc.

Chronology

• Key Dates:
• 1932: Henry Schein opens a drugstore in New York City.
• 1950s:Schein adds a mail-order operation.
• 1979: Schein moves its headquarters to Long Island.
• 1990: Schein establishes its first European subsidiary.
• 1992: Schein spins off its drugs and vitamins business.
• 1995: Schein becomes a publicly owned company.
• 1997: By the end of this year Schein's roster of acquired companies has reached 67 in six years.
• 2004: The company is named to the 2004 Fortune 500 largest U.S. companies.