BioTech Markup Benchmarking

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Part
01

Distributors of Medtech Products: Gross Profit Margins

The financial statements of three publicly-traded medical device and equipment suppliers were analyzed to either directly calculate their gross profit margins (AdaptHealth) or impute the gross profit margin of the company's medical technology (non-pharmaceutical) distribution segment (Owens & Minor, Inc. and Patterson Companies, Inc.). Research revealed that gross profit margins for these companies ranged from a low of approximately 13.89% (Owens & Minor) to a high of approximately 21.8% (Patterson Companies), which aligns with data indicating that "Distributor markup is generally 20%, but depending on the industry, the markup could be as low as 5% or as high as 40%."

Owens & Minor, Inc.

  • Owens & Minor (O&M) is a Fortune 500 medical product distributor based in Richmond, VA. The company is publicly traded on the New York Stock Exchange under the ticker OMI. O&M consists of two operating segments: Global Solutions, its medical supply and services reseller arm, and Global Products, its surgical product manufacturing and sales arm. As the Global Solutions segment concentrates on medical supply distribution, rather than manufacture, analysis was limited to this segment.
  • According to O&M's 2018 Annual Report, the majority of Global Solutions' distribution arrangements are structured on a cost-plus percentage basis, where a negotiated percentage markup is added to the good and / or service, after being agreed upon by the end customer and the product supplier, in order to compensate O&M.
  • For fiscal year 2018, O&M's Global Solutions segment earned net revenue of $9,188,066,000. However, O&M does not report its Cost of Goods Sold by segment, so it is not possible to directly calculate Global Solutions' net profit margin. Since Global Solutions' contributed 93.38% of O&M's net revenue in 2018 on total costs of good sold of $8.47 billion, 93.38% of O&M's $1,366,963,000 gross profit margin can be indirectly attributed to Global Solutions, or $1,276,564,000. This imputed gross profit can then be used to impute a gross profit margin as a percentage of Global Solutions net revenue ($1,276,564,000 imputed gross profit / $9,188,066,000 Global Solutions net revenue) to arrive at an implied gross profit margin for Global Solutions of 13.89%.

AdaptHealth

  • AdaptHealth is a home medical equipment and technology provider based in Pennsylvania. The company went public on the NASDAQ through a reverse merger in November 2019 under the ticker AHCO. AdaptHealth's primary services include providing sleep therapy equipment and supplies to consumers and providing home medical equipment to patients discharged from acute care. According to a November 2019 investor presentation filed with the SEC, AdaptHealth's revenue is made up of 59% in home medical equipment sales and 41% in home medical equipment rentals; 57% of its revenue comes from sleep products.
  • According to a November 2019 SEC 8-K filing describing AdaptHealth's reverse merger with DFB Healthcare Acquisitions Corp., AdaptHealth reported $380 million in total net revenue for the nine months ending September 30, 2019, on a cost of net revenue of $317 million. From this, a gross profit margin of approximately 16.5% can be calculated (1 - ($317 million / $380 million)).

Patterson Companies, Inc.

  • Patterson Companies, Inc. (Patterson) is a specialty distributor of dental and animal health medical products based in St. Paul, MN. The company is publicly traded on the NASDAQ under the ticker PDCO. Patterson operates two primary business units: Patterson Dental, which distributes dental consumable supplies, equipment, and technology to US and Canadian dental health providers, and Patterson Animal Health, which provides pharmaceuticals, equipment, and supplies to veterinary health providers. Since Patterson Dental does not sell pharmaceutical products, analysis was limited to this operating segment alone.
  • According to its 2019 Annual Report (for the fiscal year ending April 27, 2019), Patterson Dental's total net sales of $2.2 billion were divided as follows: 55% consumable products, 32% equipment and software, and 13% other products. Patterson Dental contributed 39.3% to Patterson's total net sales of $5.57 billion for its 2018 – 2019 fiscal year. Patterson's total cost of sales across all segments was 78.6% of its net sales, or $4.38 billion, for a total gross profit margin of 21.4%. However, while Patterson does not report its cost of sales by segment, it did report that Patterson Dental had higher profit margins than its Animal Health segment in fiscal year 2018 – 2019. It can be inferred that Patterson Dental's cost of sales was approximately ($4.38 billion in total cost of sales * 39.3% Patterson Dental's share of total sales), or $1.72 billion. Using this imputed value and Patterson Dental's reported total net sales of $2.2 billion, Patterson Dental's segment-specific gross profit margin can be estimated as (1 - ($1.72 billion / $2.2 billion)) = 21.8%.
  • The estimated gross profit margin of 21.8% for Patterson Dental, compared to a reported consolidated gross profit margin of Patterson of 21.4%, aligns with Patterson's claims that its consolidated gross profit margin was dragged down by the Animal Health segment's lower profit margins, as Animal Health is approximately 60% of Patterson's total sales.

Research Strategy

Since accurate financial data for privately-held companies is very difficult to source and validate, we concentrated our research on identifying examples of medical technology distribution companies that are publicly traded in the United States. Research revealed that most publicly-traded companies in this industry are not only in the business of distribution, but also manufacturing, and include pharmaceuticals among their manufacturing and / or distribution businesses; we could only identify AdaptHealth as a publicly-traded supplier that is not involved in manufacturing or pharmaceuticals. In order to identify other example businesses, we expanded our search to include business segments of other publicly-traded medical supply companies, limiting to segments that were not involved in manufacturing or pharmaceutical products (Owens & Minor's Global Solutions segment and Patterson Companies' Patterson Dental segment).


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