med-surg distribution is it the ugly stepsister or is it cinderella or is it one and the same?...

Med-Surg Med-Surg DistributionDistribution

Is it the ugly stepsister Is it the ugly stepsister oror

Is it Cinderella Is it Cinderella oror

Is it one and the same?Is it one and the same?

WSHMMAApril 28, 2006

WSHMMAApril 28, 2006

Medical-Surgical Distribution Medical-Surgical Distribution OverviewOverview

About 25% of the About 25% of the dollars purchased dollars purchased by Materials by Materials Management Management flows through flows through Medical-Surgical Medical-Surgical DistributionDistribution

Medical-Surgical DistributionMedical-Surgical DistributionEconomicsEconomics

• Purchasing costs related to supply Purchasing costs related to supply channelchannel

• Hospitals typically buy med-surg Hospitals typically buy med-surg products from one or two distributors – products from one or two distributors – average cost $1.31/lineaverage cost $1.31/line

• Hospitals typically buy direct from 442 Hospitals typically buy direct from 442 med-surg manufacturers – average med-surg manufacturers – average cost $5.43/linecost $5.43/line

Source: HIDA Hospital Procurement Study, April 2005

Medical-Surgical Distribution Medical-Surgical Distribution EconomicsEconomics

• Distributors need to Distributors need to generate a minimum generate a minimum gross margin of 10.5 – gross margin of 10.5 – 11%11%

• Distributors average Distributors average about 7–10% for SGAabout 7–10% for SGA

• Distributors operating Distributors operating margin is about 1-3%margin is about 1-3%

• Distributors net after Distributors net after tax profit is about 1–3%tax profit is about 1–3%

Medical-Surgical Distribution Medical-Surgical Distribution Economics…Economics…

Source of gross marginSource of gross margin• 65% sell side (provider)65% sell side (provider)

• cost/pluscost/plus• activity basedactivity based• private labelprivate label• self-manufacturedself-manufactured• non-contractednon-contracted


Source of gross margin…Source of gross margin…• 35% buy side (manufacturer)35% buy side (manufacturer)

• payment terms (e.g., 2% if pay within 15 days)payment terms (e.g., 2% if pay within 15 days)• tracing fees (e.g., 1%)tracing fees (e.g., 1%)• forward buysforward buys• buying through secondary sourcesbuying through secondary sources• annual growth/efficiency rebates (3.5% small mfg; 1% annual growth/efficiency rebates (3.5% small mfg; 1%

large mfg)large mfg)– EDI, full truck loadsEDI, full truck loads

• distributor/manufacturer relationship productsdistributor/manufacturer relationship products– selling cost (upwards of 15-20%)selling cost (upwards of 15-20%)– BVP, Focus, Max ImpactBVP, Focus, Max Impact


Product Category% of

Total Sales Product Category% of

Total Sales

Wound Staples & Endosurgery 10.0% Kits, Packs & Trays Standard 2.4%

Kits, Packs & Trays-Custom 9.4% Solutions 2.3%

Parenteral 9.3% Urological 2.1%

Woven & Nonwoven Goods 6.2% Wound Care 1.6%

Wound Sutures 5.7% Patient Restraints & Supports 1.3%

Respiratory 4.5% Metal/Plastic/Paper Products 1.3%

Needles & Syringes 4.3% Enteral Feeding & Medical Nutritionals 1.3%

Gloves 4.1% Hazardous Waste Control 1.3%

Adhesives, Bandages, Dressings, & Sponges 3.5% Incontinence Products 1.3%

Electromedical 2.8% Antimicrobials, Disinfectants, & Scrubs 1.3%

Surgical Instruments & Devices 2.6% Catheters, Diagnostic & Therapeutic 1.2%

Sterilization Supplies & Products 2.6% Soaps/Shampoos/Powders 1.0%

• 80% of the volume a distributor sells 80% of the volume a distributor sells is driven by 20 product categoriesis driven by 20 product categories

Source: HPISA Data 2005


3M3M

BardBard

BaxterBaxter

BDBD

CardinalCardinal

DeRoyalDeRoyal

HospiraHospira

J&JJ&J

Kimberly ClarkKimberly Clark

Tyco/KendallTyco/Kendall

• Only approximately 10 manufacturers Only approximately 10 manufacturers provide funding to the distributors for provide funding to the distributors for these 20 product categories.these 20 product categories.

Medical-Surgical DistributionMedical-Surgical DistributionEconomics…Economics…

• 2005 Distributor Financial Performance 2005 Distributor Financial Performance SurveySurvey

• Tracks physician/alternate site; hospital; Tracks physician/alternate site; hospital; long-term carelong-term care

• Median revenue growthMedian revenue growth– 20032003 10%10%– 20042004 7%7%– 20052005 projected to riseprojected to rise

Source: HIDA Educational Foundation

HIDAHIDAThe Distributor of the FutureThe Distributor of the Future

• Industry thought leaders demandingIndustry thought leaders demanding• integrated relationshipintegrated relationship• focus on across-the-board cost focus on across-the-board cost

reductions with greater transparencyreductions with greater transparency• data sharingdata sharing• assistance in productassistance in product standardizationstandardization• general expertise in general expertise in procurement, products, procurement, products, logisticslogistics

Source: HIDA-The Distributor of the Future

• Key conclusionsKey conclusions• Customers place high value on Customers place high value on

distributor’s roledistributor’s role• Shift from price-focus to cost-focusShift from price-focus to cost-focus

– point of diminishing returns on price point of diminishing returns on price concessionsconcessions

– drive cost reduction in areas such as drive cost reduction in areas such as standardization, clinical labor savingsstandardization, clinical labor savings

– fee-for-service trend in its earliest stagesfee-for-service trend in its earliest stages

HIDAHIDAThe Distributor of the Future…The Distributor of the Future…



• Key conclusions…Key conclusions…• New distributor-customer relationship New distributor-customer relationship

evolvingevolving– focus on problem solving not negotiatingfocus on problem solving not negotiating– distributors need to define themselves in distributors need to define themselves in

terms of customers not the manufacturerterms of customers not the manufacturer– new clinical services for customersnew clinical services for customers



• Key conclusions…Key conclusions…• Role of acute care sales rep is Role of acute care sales rep is

changingchanging– not about pushing productnot about pushing product– is about helpingis about helping

• standardizationstandardization• overall cost reductionoverall cost reduction• go-between for materials and clinicalgo-between for materials and clinical• representing hospital with manufacturerrepresenting hospital with manufacturer• bird dogging GPO contract compliancebird dogging GPO contract compliance

– continued smooth functioning of daily continued smooth functioning of daily activityactivity

– new compensation model requirednew compensation model required


• Key conclusions…Key conclusions…• IDN independence: driving changeIDN independence: driving change

– shift away from centralized decision shift away from centralized decision making is refragmenting the industry to its making is refragmenting the industry to its local/regional rootslocal/regional roots

– new levels of scrutinynew levels of scrutiny– increased service demandincreased service demand– look to distributor as supply chain look to distributor as supply chain

advocate both internal and externaladvocate both internal and external– IDN participation providing benefits that IDN participation providing benefits that

use to come from GPOuse to come from GPO



• Key conclusions…Key conclusions…• Customers view distributors as Customers view distributors as

essential to the standardization essential to the standardization processprocess– clinical preference itemsclinical preference items



• Strategies for SuccessStrategies for Success• Customer Customer

segmentationsegmentation• Embrace the IDN Embrace the IDN

power shiftpower shift




• Strategies for Success…Strategies for Success…• Manufacturer relationshipsManufacturer relationships

– manufacturers challenged to preserve or manufacturers challenged to preserve or rebuild their brand powerrebuild their brand power

– manufacturers threatened by drive in manufacturers threatened by drive in product standardization and distributor product standardization and distributor private labelprivate label

– manufacturers want a distributor manufacturers want a distributor declaration for rules of engagement to declaration for rules of engagement to avoid unplanned competitionavoid unplanned competition

– distributors need to define the role and distributors need to define the role and importance of manufacturer alignment in importance of manufacturer alignment in their businessestheir businesses


Medical-Surgical DistributionMedical-Surgical Distribution

Is the landscape changing?Is the landscape changing?

Does the landscape need to change?Does the landscape need to change?

Change will affect us.Change will affect us.

We can impact change.We can impact change.

Potential Market Drivers…Potential Market Drivers…

WHO

WHAT

WHEN

WHERE WHY

Potential Market DriversPotential Market Drivers

• EuropeEurope 10-15 years ago – new 10-15 years ago – new warehousingwarehousing

• no large pan distributorno large pan distributor• 3PL – broad statement3PL – broad statement• would warehouse anything, selling servicewould warehouse anything, selling service• would not own inventory but would manage itwould not own inventory but would manage it• would market, collect the money, reportwould market, collect the money, report• brought forward with the advance of brought forward with the advance of

computer systems and bar codescomputer systems and bar codes• popping up all over/extremely efficientpopping up all over/extremely efficient


By 2007, estimated that more than 75% By 2007, estimated that more than 75% of commodity products distributed by of commodity products distributed by the medical-surgical distributor will the medical-surgical distributor will come from outside the United States. come from outside the United States.


Wall Street Journal, July 5, 2005Wall Street Journal, July 5, 2005• Omnibus facilities (outsourced warehouses) are Omnibus facilities (outsourced warehouses) are

increasing as way stations in the global, just-in-increasing as way stations in the global, just-in-time economytime economy

• cost cuttingcost cutting• shifting of production offshoreshifting of production offshore• $89.4 billion third-party $89.4 billion third-party

logistics industrylogistics industry• 16.3% increase in 2004 revenue 16.3% increase in 2004 revenue

for the U.S. warehouse and for the U.S. warehouse and logistics sectorlogistics sector

• distribution warehousing/the distribution warehousing/the next arena of corporate re-next arena of corporate re-engineering and cost-cuttingengineering and cost-cutting

Source: Wall Street Journal, July 5, 2005


• Key PlayersKey Players

• C.H. Robinson Worldwide, Inc.C.H. Robinson Worldwide, Inc.• Penske Logistics LLCPenske Logistics LLC• United Parcel Service, Inc.United Parcel Service, Inc.• DHLDHL



• ODW Logistics, Inc.ODW Logistics, Inc.

• operates in Columbus, Ohio (third largest port operates in Columbus, Ohio (third largest port of entry for textiles in U.S.)of entry for textiles in U.S.)

• warehouses in Dallas; Chicago; Urbana, IL; warehouses in Dallas; Chicago; Urbana, IL; Battle Creek, MIBattle Creek, MI

• 515 employees515 employees• expects revenue to increase 38% in 2005 from expects revenue to increase 38% in 2005 from

$35M $35M • located along transportation corridorslocated along transportation corridors



• ODW Logistics, Inc. …ODW Logistics, Inc. …

• Ralston Foods will use ODW to meet Wal-Ralston Foods will use ODW to meet Wal-Mart’s demand for RFID/rather than Ralston Mart’s demand for RFID/rather than Ralston making the investment they and other ODW making the investment they and other ODW customers will share the expensecustomers will share the expense

• Edwards Lifesciences Corp. chose ODW two Edwards Lifesciences Corp. chose ODW two years ago – 90% of product shifted to ODWyears ago – 90% of product shifted to ODW

• Demanding customers (customer order in by Demanding customers (customer order in by 4pm Eastern for next day delivery – 3 hours 4pm Eastern for next day delivery – 3 hours to pack/ship 400 items)to pack/ship 400 items)



• UPS Opens New Logistics Facility To UPS Opens New Logistics Facility To Serve Healthcare IndustryServe Healthcare Industry

• press release, Louisville, Sept. 30, 2005press release, Louisville, Sept. 30, 2005• 500,000 square-foot distribution center 500,000 square-foot distribution center • more accessibility to pharmaceutical, medical more accessibility to pharmaceutical, medical

device, and equipment companiesdevice, and equipment companies• located near company’s Worldport global air hublocated near company’s Worldport global air hub• 2525thth UPS facility in North America dedicated to UPS facility in North America dedicated to

healthcarehealthcare• can deliver to mass market retailers, can deliver to mass market retailers, pharmacies, healthcare facilities, pharmacies, healthcare facilities, and consumersand consumers


• tend to only ship directtend to only ship direct• desire to maintain their desire to maintain their

relationship with the end relationship with the end user/decision makeruser/decision maker

• desire to control their destiny desire to control their destiny to profitabilityto profitability

• shifting of investor funds from shifting of investor funds from the pharma sector to devices the pharma sector to devices

• medical devices have quick medical devices have quick product cycles but device product cycles but device companies develop lasting companies develop lasting relationships with customersrelationships with customers

• Suppliers of physician preference Suppliers of physician preference

products are maintaining a limited products are maintaining a limited supply chainsupply chain

• Suppliers of physician preference Suppliers of physician preference products are maintaining a limited products are maintaining a limited supply chainsupply chain


• Manufacturer models are changingManufacturer models are changing

Johnson & JohnsonJohnson & Johnson

• December 2003 – Change in J&J’s distribution policy – December 2003 – Change in J&J’s distribution policy – would sell only to U.S. wholesalers that buy its products only would sell only to U.S. wholesalers that buy its products only from J&J. Aim to eliminate secondary marketfrom J&J. Aim to eliminate secondary market

• April 2005 – J&J products stocked in their new 400,000+ April 2005 – J&J products stocked in their new 400,000+ square foot warehouse in Memphis, TN, next to Federal square foot warehouse in Memphis, TN, next to Federal ExpressExpress

Today, estimated they are shipping 20% of their Wound Today, estimated they are shipping 20% of their Wound Closure-Endomechanical direct from Memphis versus Closure-Endomechanical direct from Memphis versus virtually 0% over a year agovirtually 0% over a year ago


• E-CommerceE-Commerce• Hey dot.com what’s your value Hey dot.com what’s your value

proposition?proposition?• GHXGHX

– Purpose is an affordable Purpose is an affordable portalportal

– In the product business In the product business and wanted to protect and wanted to protect the interests of the the interests of the manufacturer and manufacturer and providerprovider


• IDN MaturationIDN Maturation• Focused on supply Focused on supply

expense managementexpense management• Deflation of product cost Deflation of product cost • Looking at distribution Looking at distribution

optionsoptions– shift of products from med-shift of products from med-

surg to pharmasurg to pharma– outsourcing to distributoroutsourcing to distributor– self-distributionself-distribution– leveraging better deal with leveraging better deal with

existing partnerexisting partner– aggregating business on a aggregating business on a

geographic basisgeographic basis

In Arkansas:In Arkansas: St. Joseph’s Mercy Health Center, Hot Springs St. Edward Mercy Health Network, Fort Smith Mercy Health System of Northwest Arkansas, Rogers

In Kansas:In Kansas: Mercy Health System of Kansas

In Missouri:In Missouri: St. John’s Mercy Health Care, St. Louis St. John’s Health System, Springfield

In Oklahoma:In Oklahoma: Mercy Health System of Oklahoma

Member Facilities

Co-workers

Physicians

Inpatient Discharges

Outpatient Visits

Emergency Room Visits

Charity Care,Medicare Allowances

And Community Benefit

Beds

• 18 acute care hospitals

• 1 heart hospital

• 818 integrated physicians

• Managed care organizationMercy Health Plans

• Community-based OutreachMercy Ministries of Laredo

26,000 FTES

3,100 (818 employed)

Acute: 143,579Total: 158,943

4,979,788

428,257

$144.1 million

4,119 total licensed beds(3,232 acute)

Profile:Profile: Sisters of Mercy Health SystemSisters of Mercy Health System

Information current for Fiscal Year 2004, ending June 2004

Facilities

Co-workers

Net Revenue

•Corporate Office – St. Louis

•Consolidated Services Center – Springfield, MO

142 FTEs from varied clinical and business disciplines

$200 million

ROi helps Mercy with ROi helps Mercy with innovative solutions that innovative solutions that

improve the cost-improve the cost-effectiveness, quality and effectiveness, quality and

safety of care through safety of care through tactical and intellectual tactical and intellectual resources fortified by resources fortified by

aggregation, teamwork, aggregation, teamwork, and shared values.and shared values.

Supply Chain Management Consolidated Services Center Inventory Management Pharmaceutical Repackaging Purchasing Customer Service Optimization Management Transportation Management

Group Purchasing Supply and Pharmaceutical Contracting Capital Equipment Contracting Contract Compliance Monitoring Rebate Management Pricing Administration Member Services

Performance Consulting Clinical Resource Optimization Pharmacy Performance Improvement Process Performance Improvement

Our Structure…Our Structure…

The CSC Operation…The CSC Operation…

Springfield, MO 101,000 Square Feet Air conditioned Refrigerated Storage Frozen Storage Controlled Substance Cage

and Vault Suitable for all Healthcare

supply storage needs in one facility

Pharmaceutical Repackaging Operation

Customer Service on-site

Comparison of Distributors to ROComparison of Distributors to RO ii

MotivationMotivation Traditional Distributor Traditional Distributor GoalsGoals

CapitalCapital Configure facility to support Configure facility to support their core service (med surg, their core service (med surg, linen, pharmaceutical, etc…)linen, pharmaceutical, etc…)

Configure facility to support Configure facility to support all system and affiliate all system and affiliate supply needs and goalssupply needs and goals

Stocking LogicStocking Logic Only stock goods that move Only stock goods that move frequentlyfrequently

Stock the goods needed to Stock the goods needed to support system and affiliate support system and affiliate needsneeds

ServiceService Provide service equal to Provide service equal to competition or generally competition or generally accepted standardsaccepted standards

Provide service that meets Provide service that meets the expectations of Mercy the expectations of Mercy and other affiliatesand other affiliates

FinancialFinancial Maximize profitMaximize profit Remain cash neutralRemain cash neutral

RepresentationRepresentation Consistently reducing staff.Consistently reducing staff.

Decision making remotely Decision making remotely locatedlocated

On-site representation with On-site representation with deeper knowledge of deeper knowledge of business and customer business and customer needs - a service focus, not needs - a service focus, not salessales

Membership Listing

QUESTION: How large of a QUESTION: How large of a distributor is ROdistributor is ROii??

1. 1. Cardinal Health (Allegiance)Cardinal Health (Allegiance) +$1,000,000,000+$1,000,000,0002. 2. Owens & MinorOwens & Minor +$1,000,000,000+$1,000,000,0003. 3. Fisher HealthcareFisher Healthcare +$1,000,000,000+$1,000,000,0004. 4. MeKesson Medical-SurgicalMeKesson Medical-Surgical +$1,000,000,000+$1,000,000,0005. 5. Henry Schein, IncHenry Schein, Inc +$1,000,000,000+$1,000,000,0006. 6. PSS/World Medical, IncPSS/World Medical, Inc +$1,000,000,000+$1,000,000,000

7. 7. Burrows CompanyBurrows Company $100,000,000 - $250,000,000$100,000,000 - $250,000,0008. 8. Midwest Medical SupplyMidwest Medical Supply $100,000,000 - $250,000,000$100,000,000 - $250,000,0009. 9. Resource Optimization Resource Optimization $100,000,000 - $250,000,000$100,000,000 - $250,000,00010. 10. Professional Hospital SupplyProfessional Hospital Supply $100,000,000 - $250,000,000 $100,000,000 - $250,000,00011. 11. Seneca Medical, IncSeneca Medical, Inc $100,000,000 - $250,000,000 $100,000,000 - $250,000,000

12. 12. Buffalo Hospital Supply CompanyBuffalo Hospital Supply Company $50,000,000 - $100,000,000$50,000,000 - $100,000,00013. 13. Medical Specialties DistributorsMedical Specialties Distributors $50,000,000 - $100,000,000 $50,000,000 - $100,000,00014. 14. NeighborCareNeighborCare $50,000,000 - $100,000,000 $50,000,000 - $100,000,00015.15. Pharmed Group CorporationPharmed Group Corporation $50,000,000 - $100,000,000 $50,000,000 - $100,000,000

According to the Health Industry Distribution Association’s membership of over 200 distributors, the distributed volume through the CSC ranks ROi in the top 10 largest Healthcare distribution companies in the nation.

According to the Health Industry Distribution Association’s membership of over 200 distributors, the distributed volume through the CSC ranks ROi in the top 10 largest Healthcare distribution companies in the nation.

$180,000,000$180,000,000


• GPOGPO• deflation of product cost – impacts deflation of product cost – impacts

distributors margins in the cost plus distributors margins in the cost plus modelmodel

• move away from sole source – increases move away from sole source – increases contract administration for the distributorcontract administration for the distributor

• government impact on administrative fees government impact on administrative fees – potential shift– potential shift

• pressure to drive increased value for pressure to drive increased value for membersmembers

• exploring non-traditional opportunitiesexploring non-traditional opportunities


• Impact of boutique distributors (e.g., Impact of boutique distributors (e.g., Suture Express)Suture Express)

• Reduction in secondary source buyingReduction in secondary source buying

• U.S. fuel prices up from a year agoU.S. fuel prices up from a year ago11

• Gasoline up 24.4%Gasoline up 24.4%• Diesel up 22.4%Diesel up 22.4%

Source: 1eia.doe.gov 4/17/06


• U.S. Truck Driver ShortageU.S. Truck Driver Shortage• long-haul, heavy-dutylong-haul, heavy-duty• predict shortage of 111,000 by 2014predict shortage of 111,000 by 2014• wages, away from home, unpredictable wages, away from home, unpredictable

schedulesschedules• next decadenext decade

– supply will grow at 1.6% annual ratesupply will grow at 1.6% annual rate– demand will grow at 2.2% annual rate demand will grow at 2.2% annual rate

(320,000)(320,000)– retirement (219,000)retirement (219,000)

Source: American Trucking Association


• Pharma distributionPharma distribution• shift of products from med-surg shift of products from med-surg

to pharma (e.g., contrast media; to pharma (e.g., contrast media; hemostatis; IV solutions/sets)hemostatis; IV solutions/sets)

• move from forward buys to drug move from forward buys to drug manufacturers paying fees for manufacturers paying fees for serviceservice

• Medicare drug benefitMedicare drug benefit• onslaught of new genericsonslaught of new generics• anticipated that 20-30% of vendor anticipated that 20-30% of vendor

margin driven by price inflationmargin driven by price inflation• YTD branded price inflation solid, YTD branded price inflation solid,

second half trends and beyond second half trends and beyond less clearless clear


• Distributors moving to protect their Distributors moving to protect their marginsmargins

• private label 2x the margins of standard private label 2x the margins of standard distribution distribution

• self-manufactured 3-5x the margins of self-manufactured 3-5x the margins of standard distributionstandard distribution

• buying small manufacturersbuying small manufacturers• low unit of measure programslow unit of measure programs• pushing to migrate to activity basedpushing to migrate to activity based• exploring non-traditional opportunitiesexploring non-traditional opportunities

Cardinal Health Inc. (CAH) Cardinal Health Inc. (CAH)

• $74.9B in sales (2005)$74.9B in sales (2005)

• Cost reductions, restructuring to drive Cost reductions, restructuring to drive earningsearnings

• 50 plus past acquisitions have not been integrated50 plus past acquisitions have not been integrated• working to consolidate/outsource IT to Indiaworking to consolidate/outsource IT to India

$20M annual savings estimated$20M annual savings estimated• integrating financial functionsintegrating financial functions

$25-35M annual savings estimated$25-35M annual savings estimated• integrating HOUR functions and outsourcing integrating HOUR functions and outsourcing

transactionstransactions $10M annual savings estimated$10M annual savings estimated

• consolidation of customer call centersconsolidation of customer call centers $5-15M annual savings estimated$5-15M annual savings estimated

Source: Merrill Lynch, April 19, 2006

Cardinal Health Inc. (CAH)…Cardinal Health Inc. (CAH)…

• Expansion opportunitiesExpansion opportunities• CAH views as key driver of future growthCAH views as key driver of future growth

– today 10% or so of EBIT is internationaltoday 10% or so of EBIT is international– 2010 20% of EBIT could be international2010 20% of EBIT could be international– likely Canada and Europelikely Canada and Europe– most immediate in CTS and med-surg distributionmost immediate in CTS and med-surg distribution

• April 17, 2006 R. Kerry Clark succeeds April 17, 2006 R. Kerry Clark succeeds Robert D. Walter as chief executiveRobert D. Walter as chief executive

Medical-Surgical DistributionMedical-Surgical Distribution

Is the landscape changing? Is the landscape changing?

Does the landscape need to change?Does the landscape need to change?

Thoughts…

Discussion…

med-surg distribution is it the ugly stepsister or is it cinderella or is it one and the same?...

Documents

distributors average

medsurg distribution

sga distributors average

distributors net

medsurg products

line source

line hospitals

minimum gross margin