Keeping Your Options Open

Edition: August 2009 - Vol 17 Number 08
Article#: 3251
Author: Mark Thill

The way Michael Einhorn sees it, it’s all about having options. “When you negotiate with someone, you have to have options,” says Einhorn, president of Dealmed Medical Supplies, a 6-year-old distributor in Brooklyn, N.Y. “The same thing applies to medical supplies.”

In Einhorn’s case, Option No. 1 is physician sales. That’s the company’s strength. But Option No. 2 is the EMS market. “With two different markets, if you have a slow month in physician sales, EMS picks it up. Or it can be slow with EMS, better with physician. You always have that counterbalance.”

It’s difficult to say how many distributors are pursuing similar options. Judging from the activities of Melville, N.Y.-based Henry Schein, however, the opportunities are plentiful. Under the direction of President Hal Muller, Schein’s Special Markets Division serves dental schools, correctional facilities, community health facilities, embassies, dialysis, federal government, export, sports medicine, student health and institutions. The division’s recent sales meeting in South Carolina was attended by 125 Schein members and 75 suppliers.

IMCO’s recent decision to hire a manager of specialty markets (Cindy Duggan, former marketing manager and distribution manager for the ASO Corp. Medical Division) also reflects the growing interest in special markets. While roughly 90 percent of IMCO’s $2.3 billion collective volume is consumed in primary care, acute care and long-term care, 10 percent is in other markets. “And that 10 percent gets wider and wider, and the volume gets greater,” says IMCO President Bill McLaughlin. “Our members do quite a bit of business in the industrial first aid market, and more and more business in the veterinary and dental markets.”

The beauty of establishing a specialty markets initiative is that IMCO members already carry a good portion of the products and equipment that these other markets need, says McLaughlin. What’s more, as IMCO takes on products specific to some non-traditional markets, those products are open to the entire membership.

Judging from the most recent HIDA Financial Survey, a healthy percentage of med/surg distributors are exploring special markets, including EMS, police and public safety, hospice and imaging centers, according to Bill Cron, professor of marketing at the M.J. Meeley School of Business at Texas Christian University in Fort Worth. Though Cron hasn’t studied the trend, his guess is that special-markets activity is higher than it was 10 years ago. Because some of these markets are relatively small, they have escaped the attention of the big distributors, opening up opportunities for small players, he surmises.

Dental market

That’s not to say all special markets are small. Indeed, two of the biggest are dental and veterinary. Dental distribution is dominated by two public companies, Henry Schein Dental and Patterson Dental, and a host of strong independents, such as Benco Dental and Burkhart Dental Supply. Many of those distributors are members of either the American Dental Cooperative or United Dental Dealers, both of which are part of Nashville, Tenn.-based National Distribution & Contracting.

Despite the recent downturn in the economy, the long-term outlook for the dental market is strong. For example, based on a year-end 2007 survey of American Academy of Cosmetic Dentistry members, cosmetic dentistry-related revenue climbed to an average of $495,000 per practice, or about $2.75 billion across all 5,500 practices represented by the survey sample. That was a 15 percent increase over 2005. The total number of patients in 2006, projected to all 5,500 practices, was approximately 2.69 million, a 12.8 percent increase over practice reports of patients in 2005.

The surge in interest in cosmetic dentistry dates back about 10 years, says Laura Woodruff, sales manager, West, for SDI North America, a manufacturer of composites, amalgams, sealants, adhesives, tooth whitening systems, curing lights, etc. “That’s when we really started to see an increase in cosmetic dentistry practices, where offices began marketing themselves as [such],” she says. Certainly, bleaching and whitening took a big jump around that time, she adds. Other procedures, such as bonding and implants, have been on the upswing as well.

Another strong specialty within the dental market is endodontics, that is, the repair of dying teeth, most often through root canals. Approximately 22 million endodontic procedures – 15 million of them root canals – are performed annually in the United States, according to the American Dental Association 2006 Survey of Dental Services Rendered. Close to 70 percent of root canals are performed by general dentists, and the rest by specialists.

Convergence of medical and dental

Since 2000, the paths of the dental and medical professions have come closer to converging, and that could open doors for medical products distributors. In that year, U.S. Surgeon General David Hatcher released “The Surgeon General’s Report on Oral Health,” which made the point that the mouth is the mirror for general health and well-being.

In fact, more than 120 disease symptoms can be detected through a routine oral exam, according to Delta Dental Plans Association, a network of independent, nonprofit dental-benefits companies. More than 25 percent of the 650,000 new cases of diabetes reported each year are first uncovered during a dental exam, according to the organization. And researchers have found that periodontitis is associated with other health problems, such as cardiovascular disease, stroke and bacterial pneumonia, according to the American Dental Association.

For these reasons, experts suggest that dental students should graduate with knowledge of diagnosing systemic diseases and conditions that can be affected by oral disease, diagnosing systemic diseases that can modify oral and dental diseases, and performing primary healthcare screenings and interventions, including checking for skin lesions while the patient is in the chair or talking to overweight patients about diet management.

One dental insurer – Delta Dental of Michigan – has embarked on a pilot project with 25 dentists in mid-Michigan in which participating dentists will screen their patients for high blood pressure. If they detect a problem, they will recommend that the patient see his or her primary care physician, or (with the patient’s consent) they will offer a referral through Ingham Regional Medical Center/McLaren Health Care and the Michigan Primary Care Association. Delta Dental will help provide blood pressure monitors for participating dental offices. After the results of the pilot project are reviewed, the program could expand geographically and eventually incorporate other chairside screenings for diseases, such as diabetes.

Veterinary market

Another potentially strong market for medical products distributors is the veterinary market. The primary market for veterinary supplies are the 55,000 veterinarians practicing in approximately 25,000 animal health clinics in the United States, according to the American Veterinary Distributors Association, Bel Air, Md. The total annual sales of these supplies – including pharmaceuticals, biologicals, fabrics, instruments, equipment and pet food – are roughly $3 billion.

Indeed, more than 43 million U.S. households (37 percent of the total) own a dog, 37 million (32 percent) a cat, and almost 2.1 million (3.5 percent) a horse, according to the U.S. Pet Ownership & Demographics Sourcebook, 2007 Edition, by the American Veterinary Medical Association. Dog owners run up an average annual veterinary bill of $356, while cat owners spend about $190 per household on their animals.

Although the veterinary industry isn’t recession-proof, it is recession-resistant, says Chicago-based investment firm William Blair & Co., which follows the industry. Growth rates in the veterinary market historically have exceeded those of general consumer expenditures, even in recessionary periods, note the authors of Blair’s latest report, the 2009 Veterinary Survey. During each of the years in which real GDP declined in the United States since 1972 (that is, 1974, 1975, 1980, 1981 and 1991), spending on veterinary services increased, they say. Moreover, the compound annual growth rate of veterinary spending over the 30-year period was more than double that of GDP growth.

For 2009, despite the grim economy, Blair predicts that the market growth rate for the companion animal (household-pet) market will be between 0 percent and 3 percent. “The growth of the companion-animal health market is driven by the growing human-animal bond, leading to more aggressive and expensive medical intervention, and therefore, longer life spans for pets,” conclude the study’s authors.

If the responses of approximately 1,000 veterinary professionals, surveyed by Blair at this spring’s North American Veterinary Conference in Orlando, Fla., are representative of the industry, the companion-animal market is dominated by three distributors: Butler Animal Health Supply, Webster Veterinary and MWI Veterinary Supply. Combined the three represent roughly 60 percent of the market, according to William Blair. That’s an increase of about 7 percentage points from 2006. The challenging economic environment could force some smaller, regional distributors toward bankruptcy, according to the company.

That said, the market looks strong. Again, based on the Blair survey, veterinarians expect spending on wellness and diagnostic testing to increase in the years ahead. If pet insurance catches on – as it appears to be doing – spending could accelerate even faster.

Another indicator that could bode well for veterinary products distributors is the size of veterinary practices. Thirty-six percent of the participants in the Blair survey worked in clinics with just one or two veterinarians, which is just about the same percentage as last year. However, 15 percent were from practices in hospitals with seven or more veterinarians. That’s up from 10 percent in the original 2005 survey.

“Importantly, we believe this figure will continue to grow over the coming years, as large specialty and referral practices – which are the most likely to have seven or more veterinarians – grow at a faster rate than the broader animal hospital market,” observed the report’s authors. The good news for distributors and manufacturers of diagnostic testing products (as well as providers of reference lab services) is that larger and more specialized practices tend to order or perform more diagnostic testing than smaller practices.

Agility needed

Entering a new market is not something for the slow-footed. “Companies that are prepared to be more agile and target different markets quickly are the ones that will be successful,” says Einhorn. What’s more, succeeding in a new market takes planning, perseverance and resources. “Our [EMS] business grew rapidly in 2006-7, but then we kind of lost focus for awhile,” he admits. Earlier this year, the company hired two dedicated EMS sales reps. “We’ve had a lot of success; we’re very satisfied with the results.”

One reason why Einhorn chose to explore a new market was the uncertainty of the physician market. With healthcare reform looming, and group purchasing organizations exerting their influence, the physician market has some clouds hanging over it. While EMS has its own set of challenges, it’s a growing market, he says.

Since entering the EMS market, Einhorn and his reps have had to learn a slightly different way of selling. On the physician side, “consultative selling” is the buzz phrase. One component of consultative selling is showing doctors the relative ease with which they can perform procedures in their offices that once were only performed in hospitals or surgery centers. Doctors who make the investment can increase the profitability of their practices.

But the EMS market has different drivers. “There’s no incentive for paramedics to do more procedures, so it’s not consultative selling,” points out Einhorn.

In fact, the EMS market can be quite price-sensitive. EMS agencies work on specific budgets, and they put many if not all their items out to bid. In a price-sensitive market, the rep has to create added value, says Einhorn. For the paramedic, added value might come in the form of a resuscitation device that weighs less than others on the market. The lighter the device, the less weight the paramedic or EMT must lug up and down stairs in emergencies.

In addition, service is huge. “With EMS, you get the 6 p.m. order,” he says. In other words, the call comes in at 6, and the paramedics need an item by the next morning at 9. “This happens very, very often, and it can be stressful for the EMS rep, because they know the urgency of getting the product there on time,” he says. In fact, when awarding contracts, most agencies take into consideration the service record of suppliers at least as much as their price lists.

Given the different needs of the EMS market vs. those of physicians, it’s no surprise that the two markets are best served by different sales reps.

“We originally had the same reps handle physicians and EMS,” says Einhorn. “It didn’t work out.” Now, two reps call solely on EMS accounts. “It’s a different sales channel; it’s a different strategy. It’s not consultative selling. It’s making-your-life-easier selling. There’s money to be made, but it gets very complicated when [one person] calls on EMS and doctors back to back. They’re two different worlds.”

Corporate medicine

While Dealmed’s EMS venture is proceeding fairly smoothly, another special-market venture is struggling, reflecting the economic troubles its customer base is facing.

About four years ago, Einhorn began taking a close look at the orders being placed by a number of Fortune 500 companies in New York. “I noticed they were ordering products like any general practitioner,” he recalls. So he called up one of the customers, a nurse, and asked her about it. “She told me they had their our own little practice, with a doctor and nurses. She said they did blood tests for employees, EKGs [and other procedures] to reduce their insurance premiums and to provide a general service to their employees.” Employees who got sick during the day could take the elevator to the clinic for treatment.

Compared to physician offices and the EMS market, corporate accounts look and act a lot like bureaucracies, says Einhorn. In that respect, they bear some similarity to the hospital market. At the same time, though, the clientele is pretty pleasant to work with. Compared to harried nurses and doctors in the typical physician practice, the medical staff in a corporate clinic in mid-town Manhattan is fairly laid back.

The corporate market is slow right now, a sign of the troubles facing many big firms in New York. But Einhorn believes that won’t last forever. “As soon as the economy rebounds, I feel this will be a fast-growing segment,” he says. “I don’t know how big it will be, but I believe most large employers care about their employees, and this is something that is expected in Fortune 500 companies.

“I believe that in every major city, this is definitely a market people should go after,” he continues. “Defibrillators, EKG machines, blood testing, exam tables, hepatitis A and B injections – you name it,” he says, referring to the range of products a large corporate clinic may order on a routine basis.