UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
☒
For the fiscal year ended
☐
For the transition period from ____________ to ____________
Commission file number
HENRY SCHEIN, INC
.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
,
(Address of principal executive offices)
(Zip Code)
)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
YES
:
☒
☐
YES:
☐
NO
:
☒
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES
:
☒
☐
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES
:
☒
☐
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
:
☒
Accelerated filer:
☐
☐
Smaller reporting company:
☐
growth company:
☐
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. YES:
☐
YES:
☐
☒
quoted on the Nasdaq Global Select Market on June 27, 2020, was approximately $
.
Documents Incorporated by Reference:
Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year
(December 26, 2020) are incorporated by reference in Part III hereof.
2
TABLE OF CONTENTS
Page
Number
3
24
37
38
38
38
39
41
43
67
69
124
124
127
127
127
128
128
128
128
136
137
3
PART I
ITEM 1. Business
General
Henry Schein, Inc. is a solutions company for health care professionals powered by a network of people and
technology. We believe we are the world’s largest provider of health care products and services primarily to office-
based dental and medical practitioners, as well as alternate sites of care. Our philosophy is grounded in our
commitment to help customers operate a more efficient and successful business so the practitioner can provide
better clinical care.
With more than 88 years of experience distributing health care products, we have built a vast set of small, mid-sized
and large customers in the dental and medical markets, serving more than one million customers worldwide across
dental practices and laboratories and physician practices, as well as government, institutional health care clinics and
other alternate care clinics.
We are headquartered in Melville, New York, employ more than 19,000 people (of which approximately 9,800 are
based outside the United States) and have operations or affiliates in 31 countries and territories, including the
United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech Republic, France, Germany,
Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, the Netherlands, New
Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Arab Emirates
and the United Kingdom. This broad global footprint has evolved over time through our organic success as well as
through contribution from strategic acquisitions.
Our business extends far beyond our supply chain capabilities across the globe. We provide a wide breadth
of products, value-added solutions and support to customers, including consumables and equipment. Through
Henry Schein One, we offer dental practice management, patient engagement and demand creation software
solutions. We also offer a broad range of financial services for our customers to help them operate and expand their
business operations. We believe our hands-on consultative approach to support practice decision-making is a key
differentiator for our business.
We offer a comprehensive selection of more than 120,000 branded products and Henry Schein private brand
products in stock, as well as more than 180,000 additional products available as special-order items.
As the market continues to evolve toward solutions that offer ease and convenience for ordering products and
communicating with our solutions teams, we are investing in digital enhancements to our e-commerce platforms
and our web capabilities.
We have established over 3.5 million square feet of space in 28 strategically located distribution centers around the
world to enable us to better serve our customers and increase our operating efficiency. Our infrastructure allows us
to provide rapid and accurate order fulfillment. Historically, approximately 99% of items have been shipped
without back ordering and were shipped on the same business day the order is received. Due to the significant
increase in demand for personal protective equipment (“PPE”), as a result of the COVID-19 pandemic, during the
year ended December 26, 2020, approximately 93% of items ordered were shipped without back ordering and 90%
were shipped on the same business day the order was received. As the demand for PPE stabilizes, we expect our
percentage of items shipped without back ordering and shipped on the same day to return to historic levels. This
infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to
customer service, enables us to be a single source of supply for our customers’ needs.
We conduct our business through two reportable segments: (i) health care distribution and (ii) technology and
value-added services. These segments offer different products and services to the same customer base.
The health care distribution reportable segment aggregates our global dental and medical operating segments. This
combined dental and medical segment distributes consumable products, small equipment, laboratory products, large
equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic
4
tests, infection-control products and vitamins. Our global dental group serves office-based dental practitioners,
dental laboratories, schools, government and other institutions. Our global medical group serves physician offices,
urgent care centers, ambulatory care sites, emergency medical technicians, dialysis centers, home health, federal
and state governments and large enterprises, such as group practices and integrated delivery networks, among other
providers across a wide range of specialties. While our primary go-to-market strategy is in our capacity as a
distributor, we also manufacture certain dental specialty products in the areas of implants, orthodontics and
endodontics. We have achieved scale in these global businesses primarily through acquisitions as manufacturers of
these products typically do not utilize a distribution channel to serve customers.
As an alternative to branded product options, we also market under our own private label portfolio of cost-effective,
high-quality consumable merchandise products for our dental and medical customers. Sales of our private label
products generally achieve gross profit margins that are higher than the average margin on the other products we
sell.
Our global technology and value-added services group provides software, technology and other value-added
services to health care practitioners. Henry Schein One, the largest contributor of sales to this category, offers
software systems for dental practitioners. This segment also includes a small medical software business known as
MicroMD. In addition, we offer physicians a broad suite of electronic health records, integrated revenue cycle
management, and patient communication services. Finally, our value-added practice solutions include financial
service offerings, which include practice finance solutions such as credit card billing and facilitation of customer
loans (on a non-recourse basis) to acquire equipment and technology, as well as solutions to broker dental practice
transitions. We do not take on the liability of such loans but instead receive an origination fee for coordinating
loans between practice customers and third-party banking groups.
Recent Developments
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent
Developments” herein for a discussion related to the COVID-19 pandemic and recent corporate transactions.
Industry
The global health care distribution industry, as it relates to office-based health care practitioners, is fragmented and
diverse. The industry ranges from sole practitioners working out of relatively small offices to mid-sized and large
group practices ranging in size from a few practitioners to several hundred practices owned or operated by dental
support organizations (DSOs), hospital systems, or integrated delivery networks (IDNs).
Due in part to the inability of office-based health care practitioners to store and manage large quantities of supplies
in their offices, the distribution of health care supplies and small equipment to office-based health care practitioners
has been characterized by frequent, small quantity orders, and a need for rapid, reliable and substantially complete
order fulfillment. The purchasing decisions within an office-based health care practice are typically made by the
practitioner, hygienist or office manager. Supplies and small equipment are generally purchased from more than
one distributor, with one generally serving as the primary supplier.
The health care distribution industry continues to experience growth due to demand driven by the aging population,
increased health care awareness and the importance of preventative care, an increasing understanding of the
connection between good oral health and overall health, improved access to care globally, the proliferation of
medical technology and testing, new pharmacology treatments and expanded third-party insurance coverage,
partially offset by the effects of unemployment on insurance coverage and technological improvements, including
the advancement of software and services, prosthetic solutions and telemedicine. In addition, the non-acute market
continues to benefit from the shift of procedures and diagnostic testing from acute care settings to alternate-care
sites, particularly physicians’ offices and ambulatory surgery centers.
We believe that consolidation within the industry will continue to result in a number of distributors, particularly
those with limited financial, operating and marketing resources, seeking to combine with larger companies that can
provide growth opportunities. This consolidation also may continue to result in distributors seeking to acquire
5
companies that can enhance their current product and service offerings or provide opportunities to serve a broader
customer base.
In addition, customer consolidation will likely lead to multiple locations under common management and the
movement of more procedures from the hospital setting to the physician or alternate care setting as the health care
industry is increasingly focused on efficiency and cost containment. This trend has benefited distributors capable
of providing a broad array of products and services at low prices. It also has accelerated the growth of HMOs,
group practices, other managed care accounts and collective buying groups, which, in addition to their emphasis on
obtaining products at competitive prices, tend to favor distributors capable of providing specialized management
information support. We believe that the trend towards cost containment has the potential to favorably affect
demand for technology solutions, including software, which can enhance the efficiency and facilitation of practice
management.
Competition
The distribution and manufacture of health care supplies and equipment is highly competitive. Many of the health
care products we sell are available to our customers from a number of suppliers. In addition, our competitors could
obtain exclusive rights from manufacturers to market particular products. Manufacturers also could seek to sell
directly to end-users, and thereby eliminate or reduce our role and that of other distributors. In certain parts of the
dental end market, such as those related to dental specialty products, manufacturers already sell directly to end
customers.
In North America, we compete with other distributors, as well as several manufacturers, of dental and medical
products, primarily on the basis of price, breadth of product line, e-commerce capabilities, customer service and
value-added products and services. In the dental market, our primary competitors in the U.S. are the Patterson
Dental division of Patterson Companies, Inc. and Benco Dental Supply Company. In addition, we compete against
a number of other distributors that operate on a national, regional and local level. Our primary competitors in the
U.S. medical market, which accounts for the large majority of our global medical sales, are McKesson Corporation
and Medline Industries, Inc., which are national distributors. We also compete with a number of regional and local
medical distributors, as well as a number of manufacturers that sell directly to physicians. With regard to our dental
software, we compete against numerous companies, including the Patterson Dental division of Patterson
Companies, Inc., Carestream Health, Inc., Open Dental Software, Inc., PlanetDDS LLC, Good Methods Global Inc.
(d.b.a. CareStack) and Curve Dental, LLC. In other software end markets, including revenue cycle management,
patient relationship management and patient demand generation, we compete with companies such as Vyne
Therapeutics Inc., EDI-Health Group, Inc. (d.b.a. Dental X Change, Inc.), Weave Communications,
Inc., Solutionreach, Inc., ZocDoc, Inc., LocalMed Inc. and Prosites Inc. The medical practice management and
electronic medical records market is very fragmented and we compete with numerous companies such as the
NextGen division of Quality Systems, Inc., eClinicalWorks, Allscripts Healthcare Solutions, Inc., and Epic Systems
Corporation.
Outside of the U.S., we believe we are the only global distributor of supplies and equipment to dental practices, and
our competitors are primarily local and regional companies. We also face significant competition internationally,
where we compete on the basis of price and customer service against several large competitors, including the
GACD Group, Proclinic SA, Lifco AB, Planmeca Oy and Billericay Dental Supply Co. Ltd., as well as a large
number of other dental and medical product distributors and manufacturers in international countries and territories
we serve.
Competitive Strengths
We have more than 88 years of experience in distributing products to health care practitioners resulting in strong
awareness of the Henry Schein
®
A focus on meeting our customers’ unique needs
. We are committed to providing customized solutions to our
customers that are driven by our understanding of the end markets we serve and reflect the technology-driven
products and services best suited for their practice needs. We are committed to continuing to enhance these
6
offerings through organic investment in our products and our teams, as well through as the acquisition of new
products and services that may help us better serve our customers.
Direct sales and marketing expertise.
customer relationships through personal or virtual visits by field sales representatives, frequent direct marketing and
telesales contact, emphasizing our broad product lines, including exclusive distribution agreements, competitive
prices and ease of order placement, particularly through our e-commerce platforms. The key elements of our direct
sales and marketing efforts are:
•
Field sales consultants.
covering major North American, European and other international markets. These consultants complement
our direct marketing and telesales efforts and enable us to better market, service and support the sale of
more sophisticated products and equipment.
•
Marketing.
through a combination of owned, earned and paid digital channels, as well as through catalogs, flyers,
direct mail, and other promotional materials. Our strategies included an emphasis on educational content
through webinars and content marketing initiatives. We continue to enhance our marketing technology to
improve our targeting capability and the relevance of messaging and offers.
•
Telesales.
telesales representatives, who facilitate order processing, generate new sales through direct and frequent
contact with customers and stay abreast of market developments and the hundreds of new products,
services and technologies introduced each year to educate practice personnel.
•
Electronic commerce solutions.
competitive e-commerce solutions. We continue to invest in our e-commerce platform to offer enhanced
content management so customers can more easily find the products they need and to enable an engaging
purchase experience, supported by excellent customer service.
•
Social media.
various social media platforms, which are an important element of our communications and marketing
efforts. We continue to expand our social media presence to raise awareness about issues, engage
customers beyond a sale and deliver services and solutions to specialized audiences.
Broad product and service offerings at competitive prices.
customers, at competitive prices, in the following categories:
•
Consumable supplies and equipment.
customers. We offer over 180,000 additional SKUs to our customers in the form of special order items.
•
Technology and other value-added products and services.
engagement, and patient demand creation software solutions to our dental customers. Our practice
management solutions provide practitioners with electronic medical records, patient treatment history,
billing, accounts receivable analyses and management, appointment calendars, electronic claims processing
and word processing programs, network and hardware services, e-commerce and electronic marketing
services, sourcing third party patient payment plans, transition services and training and education
programs for practitioners. We also sell medical software for practice management, certified electronic
health records (“EHR”) and e-Prescribe medications and prescription solutions through MicroMD®. We
have approximately 800 technical representatives supporting customers using our practice management
solutions and services. As of December 26, 2020, we had an active user base of approximately 94,500
practices and 374,000 consumers, including users of AxiUm, Dentally®, Dentrix Ascend®, Dental
Vision®, Dentrix® Dental Systems, Dentrix® Enterprise, Easy Dental®, EndoVision®, Evolution® and
EXACT®, Gesden®, Julie® Software, Oasis, OMSVision®, Orisline®, PerioVision®, Power Practice®
Px, PowerDent, and Viive® and subscriptions for Demandforce®, Sesame, and Lighthouse360® for dental
practices and DentalPlans.com® for dental patients; and MicroMD® for physician practices.
7
•
Repair services.
repair, installation and technical services for our health care customers. Our over 2,000 technicians provide
installation and repair services for: dental handpieces; dental and medical small equipment; table top
sterilizers; and large dental equipment.
•
Financial services.
providing access to a number of financial services and products provided by third party vendors (including
non-recourse financing for equipment, technology and software products; non-recourse patient financing;
collection services and credit card processing) at rates that we believe are generally lower than what our
customers would be able to secure independently. We also provide consulting services, dental practice
valuation and brokerage services.
Commitment to superior customer service
. We maintain a strong commitment to providing superior customer
service. We frequently monitor our customer service through customer surveys, focus groups and statistical
reports. Our customer service policy primarily focuses on:
•
Exceptional order fulfillment
. We ship an average of approximately 128,000 cartons daily. Historically,
approximately 99% of items have been shipped without back ordering and were shipped on the same
business day the order is received. Due to the significant increase in demand for PPE, as a result of
COVID-19, during the year ended December 26, 2020, approximately 93% of items ordered were shipped
without back ordering and 90% were shipped on the same business day the order was received. As the
demand for PPE stabilizes, we expect our percentage of items shipped without back ordering and shipped
on the same day to return to historical levels.
•
Comprehensive ordering process
. Customers may place orders 24 hours a day, 7 days a week via e-
commerce solutions, telephone, fax, e-mail, and mail.
Integrated management information systems
. Our information systems generally allow for centralized management
of key functions, including accounts receivable, inventory, accounts payable, payroll, purchasing, sales, order
fulfillment and financial and operational reporting. These systems allow us to manage our growth, deliver superior
customer service, properly target customers, manage financial performance and monitor daily operational statistics.
Cost-effective purchasing
. We believe that cost-effective purchasing is a key element to maintaining and enhancing
our position as a competitively priced provider of health care products. We continuously evaluate our purchase
requirements and suppliers’ offerings and prices in order to obtain products at the lowest possible cost. In 2020,
our top 10 health care distribution suppliers and our single largest supplier accounted for approximately 30% and
4%, respectively, of our aggregate purchases.
Efficient distribution
. We distribute our products from our strategically located distribution centers. We strive to
maintain optimal inventory levels in order to satisfy customer demand for prompt delivery and complete order
fulfillment. These inventory levels are managed on a daily basis with the aid of our management information
systems. Once an order is entered, it is electronically transmitted to the distribution center nearest the customer’s
location for order fulfillment.
8
Products
The following table sets forth the percentage of consolidated net sales by principal categories of products offered
through our health care distribution and technology reportable segments:
December 26,
December 28,
December 29,
2020
2019
2018
Health care distribution:
Dental products
(1)
58.4
%
64.2
%
67.4
%
Medical products
(2)
35.8
29.8
28.3
Total health care distribution
94.2
94.0
95.7
Technology and value-added services:
Software and related products and
(3)
5.1
5.2
4.3
Total excluding Corporate TSA revenues
99.3
99.2
100.0
Corporate TSA revenues
(4)
0.7
0.8
-
Total
100.0
100.0
100.0
(1)
Includes infection-control products, handpieces, preventatives, impression materials, composites, anesthetics, teeth, dental implants,
gypsum, acrylics, articulators, abrasives, dental chairs, delivery units and lights, X-ray supplies and equipment, personal protective
equipment, equipment repair and high-tech and digital restoration equipment.
(2)
Includes branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, X-ray products,
equipment, personal protective equipment, and vitamins.
(3)
Consists of practice management software and other value-added products, which are distributed primarily to health care providers, and
financial services on a non-recourse basis, e-services, continuing education services for practitioners, consulting and other services.
(4)
Corporate TSA revenues represents sales of certain products to Covetrus under the transition services agreement entered into in
connection with the Animal Health spin-off, which ended in December 2020.
Business Strategy
Our objective is to continue to expand as a global value-added provider of health care products and services to
office-based dental and medical practitioners by increasing their efficiency and success. To accomplish this, we
will apply our competitive strengths in executing the following strategies:
•
Increase penetration of our existing customer base.
intend to increase sales to our existing customer base and enhance our position as their primary supplier.
We believe our offering of a broad range of products, services and support, including software solutions
that can help drive improved workflow efficiency and patient communications for practices, coupled with
our full-service value proposition, helps us to retain and grow our customer base.
•
Increase the number of customers we serve.
sales consultants and telesales team, as well as using our customer database to focus our marketing efforts
in all of our operating segments. In the dental business, we provide products and services to independent
practices, mid-market groups, and large DSOs as well as community health centers and government sites of
care. Leveraging our broad array of assets and capabilities, we offer solutions to address these new
markets. In the medical business, we have expanded to serve customers located in settings outside of the
traditional office, such as urgent care clinics, retail, occupational health and home health settings. As
settings of health care shift, we remain committed to serving these practitioners and providing them with
the products and services they need.
•
Leverage our value-added products and services.
product lines utilizing a consultative selling process. In the dental business, we have significant cross-
selling opportunities between our dental software users and our dental distribution customers. In the
medical business, we have opportunities to expand our vaccine, injectables and other pharmaceuticals sales
to health care practitioners, as well as cross-selling electronic health record and software when we sell our
core products. Our strategy extends to providing health systems, integrated delivery networks and other
large group and multi-site health care organizations, including physician clinics, these same value added
9
products and services. As physicians and health systems closely align, we have increased access to
opportunities for cross-marketing and selling our product and service portfolios.
•
Pursue strategic acquisitions and joint ventures.
companies that add new customers and sales teams, increase our geographic footprint (whether entering a
new country, such as emerging markets, or building scale where we have already invested in businesses),
and finally, those that enable us to access new products and technologies.
Markets Served
Demographic trends indicate that our markets are growing, as an aging U.S. population is increasingly using health
care services. Between 2020 and 2030, the 45 and older population is expected to grow by approximately 11%.
Between 2020 and 2040, this age group is expected to grow by approximately 22%. This compares with expected
total U.S. population growth rates of approximately 7% between 2020 and 2030 and approximately 12% between
2020 and 2040.
In the dental industry, there is predicted to be a rise in oral health care expenditures as the 45-and-older segment of
the population increases. There is increasing demand for new technologies that allow dentists to increase
productivity, and this is being driven in the U.S. by lower insurance reimbursement rates. At the same time, there is
an expected increase in dental insurance coverage.
We support our dental professionals through the many SKUs that we offer, as well as through important value-
added services, including practice management software, electronic claims processing, financial services and
continuing education, all designed to help maximize a practitioner’s efficiency.
In the medical market, there continues to be a migration of procedures from acute-care settings to physicians’
offices and home health settings, a trend that we believe provides additional opportunities for us. There also is the
continuing use of vaccines, injectables and other pharmaceuticals in alternate-care settings. We believe we have
established a leading position as a vaccine supplier to the office-based physician practitioner.
Additionally, we seek to expand our dental full-service model and our medical offerings in countries where
opportunities exist. Through our “Schein Direct” program, we also have the capability to provide door-to-door air
package delivery to practitioners in over 190 countries around the world.
For information on revenues and long-lived assets by geographic area, see
of “Notes to Consolidated Financial Statements.”
Seasonality and Other Factors Affecting Our Business and Quarterly Results
We experience fluctuations in quarterly earnings. As a result, we may fail to meet or exceed the expectations of
securities analysts and investors, which could cause our stock price to decline.
Our business is subject to seasonal and other quarterly fluctuations. Revenues and profitability generally have been
higher in the third and fourth quarters due to the timing of sales of seasonal products (including influenza vaccine,
equipment and software products), purchasing patterns of office-based health care practitioners and year-end
promotions. Revenues and profitability may also be impacted by the timing of certain annual and biennial dental
tradeshows where equipment promotions are offered. In addition, some dental practices delay equipment purchases
in the U.S. until year-end due to tax incentives. Revenues and profitability generally have been lower in the first
quarter, primarily due to increased sales in the prior two quarters. We expect our historical seasonality of sales to
continue in the foreseeable future.
10
Governmental Regulations
We strive to be substantially compliant with the applicable laws, regulations and guidance described below, and
believe we have effective compliance programs and other controls in place to ensure substantial compliance.
However, compliance is not guaranteed either now or in the future, as certain laws, regulations and guidance may
be subject to varying and evolving interpretations that could affect our ability to comply, as well as future changes,
additions, and enforcement approaches, including in light of political changes. For example, President Biden’s
administration has authorized and encouraged a freeze on certain federal regulations that have been published but
are not yet effective, as well as a review of all federal regulations issued during President Trump’s administration.
Changes with respect to the applicable laws, regulations and guidance described below may require us to update or
revise our operations, services, marketing practices, and compliance programs and controls, and may impose
additional and unforeseen costs on us, pose new or previously immaterial risks to us, or may otherwise have a
material adverse effect on our business.
Government
Certain of our businesses involve the distribution, importation, exportation, marketing and sale of, and third party
payment for, pharmaceuticals and medical devices, and in this regard, we are subject to extensive local, state,
federal and foreign governmental laws and regulations, including as applicable to our wholesale distribution of
pharmaceuticals and medical devices, and as part of our specialty home medical supply business that distributes and
sells medical equipment and supplies directly to patients. The federal government and state governments have also
increased enforcement activity in the health care sector, particularly in areas of fraud and abuse, anti-bribery and
corruption, controlled substances prescribing, medical device regulation, and data privacy and security standards.
Government and private insurance programs fund a large portion of the total cost of medical care, and there have
been efforts to limit such private and government insurance programs, including efforts, thus far unsuccessful, to
seek repeal of the entire United States Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Reconciliation Act, each enacted in March 2010, as amended (the “ACA”). In addition, activities to
control medical costs, including laws and regulations lowering reimbursement rates for pharmaceuticals, medical
devices, and/or medical treatments or services, are ongoing. Many of these laws and regulations are subject to
change and their evolving implementation may impact our operations and our financial performance.
Our businesses are also generally subject to numerous other laws and regulations that could impact our financial
performance, including securities, antitrust, consumer protection, anti-bribery and anti-kickback, customer
interaction transparency, data privacy, data security, government contracting and other laws and regulations.
Failure to comply with law or regulations could have a material adverse effect on our business.
Operating, Security and Licensure Standards
Certain of our businesses involve the distribution, importation, exportation, marketing and sale of, and third party
payment for, pharmaceuticals and medical devices, and in this regard we are subject to various local, state, federal
and foreign governmental laws and regulations, including as applicable to our wholesale distribution and sale of
pharmaceuticals and medical devices, and, as part of our specialty home medical supply business that distributes
and sells medical equipment and supplies directly to patients. Among the United States federal laws applicable to
us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended (“FDC Act”), and
Section 361 of the Public Health Service Act, as well as laws regulating the billing of and reimbursement from
government programs, such as Medicare and Medicaid, and from commercial payers. We are also subject to
comparable foreign regulations.
The FDC Act, the Controlled Substances Act, their implementing regulations, and similar foreign laws generally
regulate the introduction, manufacture, advertising, marketing and promotion, sampling, pricing and
reimbursement, labeling, packaging, storage, handling, returning or recalling, reporting, and distribution of, and
record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states may similarly
regulate such activities within the state. Furthermore, Section 361 of the Public Health Service Act, which provides
authority to prevent the introduction, transmission or spread of communicable diseases, serves as the legal basis for
11
the United States Food and Drug Administration’s (“FDA”) regulation of human cells, tissues and cellular and
tissue-based products, also known as “HCT/P products.”
The Federal Drug Quality and Security Act of 2013 brought about significant changes with respect to
pharmaceutical supply chain requirements. Title II of this measure, known as the Drug Supply Chain Security Act
(“DSCSA”), is being phased in over a period of ten years, and is intended to build a national electronic,
interoperable system to identify and trace certain prescription drugs as they are distributed in the United States.
The law’s track and trace requirements applicable to manufacturers, wholesalers, repackagers and dispensers (e.g.,
pharmacies) of prescription drugs took effect in January 2015, and continues to be implemented. The DSCSA
product tracing requirements replace the former FDA drug pedigree requirements and pre-empt certain state
requirements that are inconsistent with, more stringent than, or in addition to, the DSCSA requirements.
The DSCSA also establishes certain requirements for the licensing and operation of prescription drug wholesalers
and third-party logistics providers (“3PLs”), and includes the eventual creation of national wholesaler and 3PL
licenses in cases where states do not license such entities. The DSCSA requires that wholesalers and 3PLs
distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of
prescription drugs. The DSCSA requires wholesalers and 3PLs to submit annual reports to the FDA, which include
information regarding each state where the wholesaler or 3PL is licensed, the name and address of each facility and
contact information. According to FDA guidance, states are pre-empted from imposing any licensing requirements
that are inconsistent with, less stringent than, directly related to, or covered by the standards established by federal
law in this area. Current state licensing requirements concerning wholesalers will remain in effect until the FDA
issues new regulations as directed by the DSCSA. In addition, with respect to our specialty home medical supply
business, we are subject to certain state licensure laws (including state pharmacy laws), and also certain
accreditation standards, including to qualify for reimbursement from Medicare and other third-party payers.
The Food and Drug Administration Amendments Act of 2007 and the Food and Drug Administration Safety and
Innovation Act of 2012 amended the FDC Act to require the FDA to promulgate regulations to implement a unique
device identification (“UDI”) system. The UDI rule phased in the implementation of the UDI regulations,
generally beginning with the highest-risk devices (i.e., Class III medical devices) and ending with the lowest-risk
devices. Most compliance dates were reached as of September 24, 2018, with a final set of requirements for low
risk devices being reached on September 24, 2022, which will complete the phase in. The UDI regulations require
“labelers” to include unique device identifiers (“UDIs”), with a content and format prescribed by the FDA and
issued under a system operated by an FDA-accredited issuing agency, on the labels and packages of medical
devices (including, but not limited to, certain software that qualifies as a medical device under FDA rules), and to
directly mark certain devices with UDIs. The UDI regulations also require labelers to submit certain information
concerning UDI-labeled devices to the FDA, much of which information is publicly available on an FDA database,
the Global Unique Device Identification Database. The UDI regulations and subsequent FDA guidance regarding
the UDI requirements provide for certain exceptions, alternatives and time extensions. For example, the UDI
regulations include a general exception for Class I devices exempt from the Quality System Regulation (other than
record-keeping requirements and complaint files). Regulated labelers include entities such as device
manufacturers, repackagers, reprocessors and relabelers that cause a device’s label to be applied or modified, with
the intent that the device will be commercially distributed without any subsequent replacement or modification of
the label, and include certain of our businesses.
Under the Controlled Substances Act, as a distributor of controlled substances, we are required to obtain and renew
annually registrations for our facilities from the United States Drug Enforcement Administration (“DEA”)
permitting us to handle controlled substances. We are also subject to other statutory and regulatory requirements
relating to the storage, sale, marketing, handling, reporting, record-keeping and distribution of such drugs, in
accordance with the Controlled Substances Act and its implementing regulations, and these requirements have been
subject to heightened enforcement activity in recent times. We are subject to inspection by the DEA. Certain of our
businesses are also required to register for permits and/or licenses with, and comply with operating and security
standards of, the DEA, the FDA, the United States Department of Health and Human Services (“HHS”), and
various state boards of pharmacy, state health departments and/or comparable state agencies as well as comparable
foreign agencies, and certain accrediting bodies, depending on the type of operations and location of product
distribution, manufacturing or sale. These businesses include those that distribute, manufacture and/or repackage
12
prescription pharmaceuticals and/or medical devices and/or HCT/P products, or own pharmacy operations, or
install, maintain or repair equipment.
In addition, Section 301 of the National Organ Transplant Act, and a number of comparable state laws, impose civil
and/or criminal penalties for the transfer of certain human tissue (for example, human bone products) for valuable
consideration, while generally permitting payments for the reasonable costs incurred in procuring, processing,
storing and distributing that tissue. We are also subject to foreign government regulation of such products. The
DEA, the FDA and state regulatory authorities have broad inspection and enforcement powers, including the ability
to suspend or limit the distribution of products by our distribution centers, seize or order the recall of products and
impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. Foreign
regulations subject us to similar foreign enforcement powers.
EU Regulation of Medicinal and Dental Products
EU member states regulate their own healthcare systems, as does EU law. The latter regulates certain matters,
most notably medicinal products and medical devices. Medicinal products are defined, broadly, as substances or
combinations of substances having certain functionalities and may not include medical devices. EU “regulations”
apply in all Member States, whereas “directives” are implemented by the individual laws of member states.
On medicines for humans, we are regulated under Directive No. 2001/83/EC of 6 November 2001 and EU
Regulation No. 726/2004 of 31 March 2004. These rules provide for the authorization of products, and regulate
their manufacture, importation, marketing, and distribution. It implements requirements which may be
implemented without warning, as well as a national pharmacovigilance system under which marketing
authorizations may be withdrawn, and includes potential sanctions for breaches of the rules, and on other bases
such as harmfulness or inefficiency.
EU Regulation No. 1223/2009 of 30 November 2009
on cosmetic products
includes dental products) be safe for human health when used under normal or reasonably foreseeable conditions of
use and comply with certain obligations which apply to manufacturer, importer and distributor. It includes market
surveillance, and non-compliance may result in the recall or withdrawal of products, along with other sanctions.
In the European Union, the EU Medical Device Regulation No. 2017/745 (“EU MDR”) covers a wide scope of our
activities, from dental material to X-ray machines, and certain software. It was meant to become applicable three
years after publication (in May 2020). However, on April 23, 2020, to allow European Economic Area (“EEA”)
national authorities, notified bodies, manufacturers and other actors to focus fully on urgent priorities related to the
COVID-19 pandemic, the European Council and Parliament adopted Regulation 2020/561, postponing the date of
application of the EU MDR by one year (to May 2021). In the meantime, rules provided for by Directive No.
90/385/EEC of 20 June 1990
on the approximation of the laws of the member states relating to active implantable
medical devices
The EU MDR significantly modifies and intensifies the regulatory compliance requirements for the medical device
industry as a whole. Once applicable, the EU MDR will among other things:
•
Strengthen
the
rules
on
placing
devices
on
the
market
and
rein
force
surveillance
once
they
are
available;
•
Establish
explicit
provisions
on
manufacturers’
responsibilities
for
the
follow
-
up
of
the
quality,
performance and safety of devices placed on the market;
•
Improve
the
traceability
of
medical
devices
throughout
the
supply
chain
to
the
end
-
user
or
patient
through
a
unique identification number;
•
Se
t
up
a
central
database
to
provide
patients,
healthcare
professionals
and
the
public
with
comprehensive
information on products available in the EU;
•
Strengthen
rules
for
the
assessment
of
certain
high
-
risk
devices,
such
as
implants,
which
may
have
to
undergo an additional check by experts before they are placed on the market; and
•
Identify importers and distributors and medical device products through registration in a database
(EudaMed not due until 2022 and after).
13
In particular, the EU MDR imposes stricter requirements for the confirmation that a product meets the regulatory
requirements, including regarding a product’s clinical evaluation and a company’s quality systems, and for the
distribution, marketing and sale of medical devices, including post-market surveillance. Medical devices that have
been assessed and/or certified under the EU Medical Device Directive may continue to be placed on the market
until 2024 (or until the expiry of their certificates, if applicable and earlier); however, requirements regarding the
distribution, marketing and sale including quality systems and post-market surveillance have to be observed by
manufacturers, importers and distributors as of the application date.
Other EU regulations that may apply under appropriate circumstances include EU Regulation No. 1907/2006 of 18
December 2006
concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals
, which
requires importers to register substances or mixtures that they import in the EU beyond certain quantities, and the
EU Regulation No. 1272/2008 of 16 December 2008 on classification, labelling and packaging of substances and
mixtures (“CLP Regulation”), which sets various obligations with respect to the labelling and packaging of
concerned substances and mixtures.
Furthermore, compliance with legal requirements has required and may in the future require us to delay product
release, sale or distribution, or institute voluntary recalls of products we sell, each of which could result in
regulatory and enforcement actions, financial losses and potential reputational harm. Our customers are also
subject to significant federal, state, local and foreign governmental regulation, which may affect our interactions
with customers, including the design and functionality of our products.
Certain of our businesses are subject to various additional federal, state, local and foreign laws and regulations,
including with respect to the sale, transportation, storage, handling and disposal of hazardous or potentially
hazardous substances, and safe working conditions. In addition, certain of our businesses must operate in
compliance with a variety of burdensome and complex billing and record-keeping requirements in order to
substantiate claims for payment under federal, state and commercial healthcare reimbursement programs.
Certain of our businesses also maintain contracts with governmental agencies and are subject to certain regulatory
requirements specific to government contractors.
Antitrust and Consumer Protection
The federal government of the United States, most U.S. states and many foreign countries have antitrust laws that
prohibit certain types of conduct deemed to be anti-competitive, as well as consumer protection laws that seek to
protect consumers from improper business practices. At the U.S. federal level, the Federal Trade Commission
oversees enforcement of these types of laws, and states have similar government agencies. Violations of antitrust or
consumer protection laws may result in various sanctions, including criminal and civil penalties. Private plaintiffs
may also bring civil lawsuits against us in the United States for alleged antitrust law violations, including claims for
treble damages. EU law also regulates competition and provides for detailed rules protecting consumers.
Health Care Fraud
Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral
and reimbursement laws and regulations with respect to their operations. Some of these laws, referred to as “false
claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to
federal, state and other health care payers and programs. Other laws, referred to as “anti-kickback laws,” prohibit
soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering,
purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of, items or services that are
paid for by federal, state and other health care payers and programs. Certain additional state and federal laws, such
as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit physicians and other
health professionals from referring a patient to an entity with which the physician (or family member) has a
financial relationship, for the furnishing of certain designated health services (for example, durable medical
equipment and medical supplies), unless an exception applies.
The fraud and abuse laws and regulations have been subject to heightened enforcement activity over the past few
years, and significant enforcement activity has been the result of “relators” who serve as whistleblowers by filing
14
complaints in the name of the United States (and if applicable, particular states) under applicable false claims laws,
and who may receive up to 30% of total government recoveries. Penalties under fraud and abuse laws may be
severe, and could result in significant civil and criminal penalties and costs, including the loss of licenses and the
ability to participate in federal and state health care programs, and could have a material adverse effect on our
business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in
a manner that could require us to make changes in our operations or incur substantial defense and settlement
expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational
harm and the incurring of substantial costs. Most states have adopted similar state false claims laws, and these state
laws have their own penalties, which may be in addition to federal False Claims Act penalties, as well as other
fraud and abuse laws.
With respect to measures of this type, the United States government (among others) has expressed concerns about
financial relationships between suppliers on the one hand and physicians and dentists on the other. As a result, we
regularly review and revise our marketing practices as necessary to facilitate compliance.
We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign
operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, German anti-corruption laws
and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been
the focus of increasing enforcement activity globally in recent years.
While we believe that we are substantially compliant with applicable fraud and abuse laws and regulations, and
have adequate compliance programs and controls in place to ensure substantial compliance, we cannot predict
whether changes in applicable law, or interpretation of laws, or changes in our services or marketing practices in
response to changes in applicable law or interpretation of laws, or failure to comply with applicable law, could have
a material adverse effect on our business.
Affordable Care Act
The United States Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act, each enacted in March 2010, as amended (the “ACA”), increased federal oversight of private
health insurance plans and included a number of provisions designed to reduce Medicare expenditures and the cost
of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage. The ACA
also materially expanded the number of individuals in the United States with health insurance.
The ACA has faced ongoing legal challenges, including litigation seeking to invalidate and Congressional action
seeking to repeal some of or all of the law or the manner in which it has been implemented. In 2012, the United
States Supreme Court, in upholding the constitutionality of the ACA and its individual mandate provision requiring
that people buy health insurance or else face a penalty, simultaneously limited ACA provisions requiring Medicaid
expansion, making such expansion a state-by-state decision. In addition, one of the major political parties in the
United States remains committed to seeking the ACA’s legislative repeal, but legislative efforts to do so have
previously failed to pass both chambers of Congress. Under President Trump’s administration, a number of
administrative actions were taken to materially weaken the ACA, including, without limitation, by permitting the
use of less robust plans with lower coverage and eliminating “premium support” for insurers providing policies
under the ACA. The Tax Cuts and Jobs Act enacted in 2017 (the “Tax Act”), which contains a broad range of tax
reform provisions that impact the individual and corporate tax rates, international tax provisions, income tax add-
back provisions and deductions, also effectively repealed the ACA’s individual mandate by zeroing out the penalty
for non-compliance. In the most recent ACA litigation, the federal Fifth Circuit Court of Appeals found the
individual mandate to be unconstitutional, and returned the case to the District Court for the Northern District of
Texas for consideration of whether the remainder of the ACA could survive the excision of the individual
mandate. The Fifth Circuit’s decision was appealed to the United States Supreme Court. The Supreme Court heard
argument on the appeal on November 10, 2020, and a decision is anticipated soon. Any outcome of this case that
changes the ACA, in addition to future legislation, regulation, guidance and/or Executive Orders that do the same,
could have a significant impact on the U.S. healthcare industry.
An ACA provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program (the
“Sunshine Act”), imposes annual reporting and disclosure requirements for drug and device manufacturers and
15
distributors with regard to payments or other transfers of value made to certain covered recipients (including
physicians, dentists and teaching hospitals), and for such manufacturers and distributors and for group purchasing
organizations, with regard to certain ownership interests held by physicians in the reporting entity. The Centers for
Medicare and Medicaid Services (“CMS”) publishes information from these reports on a publicly available website,
including amounts transferred and physician, dentist and teaching hospital identities. Amendments expanded the
law to also require reporting, effective January 1, 2022, of payments or other transfers of value to physician
assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-
midwives, and this new requirement will be effective for data collected beginning in calendar year 2021. The
Sunshine Act pre-empts similar state reporting laws, although we or our subsidiaries may be required to report
under certain state transparency laws that address circumstances not covered by the Sunshine Act, and some of
these state laws, as well as the federal law, can be ambiguous. We are also subject to foreign regulations requiring
transparency of certain interactions between suppliers and their customers.
In the United States, government actions to seek to increase health-related price transparency may also affect our
business.
Another notable Medicare health care reform initiative, the Medicare Access and CHIP Reauthorization Act of
2015 (“MACRA”), enacted on April 16, 2015, established a new payment framework, which modified certain
Medicare payments to “eligible clinicians,” including physicians, dentists and other practitioners. Under MACRA,
certain eligible clinicians are required to participate in Medicare through the Merit-Based Incentive Payment
System (“MIPS”) or Advanced Alternative Payment Models (“APMs”), through which Medicare reimbursement to
eligible clinicians includes both positive and negative payment adjustments that take into account quality,
promoting interoperability, cost, and improvement activities. Data collected in the first MIPS performance year
(2017) determined payment adjustments that began January 1, 2019. MACRA standards continue to evolve, and
represent a fundamental change in physician reimbursement that is expected to provide substantial financial
incentives for physicians to participate in risk contracts, and to increase physician information technology and
reporting obligations. The implications of the implementation of MACRA are uncertain and will depend on future
regulatory activity and physician activity in the marketplace. New payment and delivery system reform programs,
including those modeled after such federal program, are also increasingly being rolled out at the state level through
Medicaid administrators, as well as through the private sector, which may further alter the marketplace and impact
our business.
Recently, in addition to other government efforts to control health care costs, there has been increased scrutiny on
drug pricing and concurrent efforts to control or reduce drug costs by Congress, the President, executive branch
agencies and various states. At the state level, several states have adopted laws that require drug manufacturers to
provide advance notice of certain price increases and to report information relating to those price increases, while
others have taken legislative or administrative action to establish prescription drug affordability boards or multi-
payer purchasing pools to reduce the cost of prescription drugs. At the federal level, several related bills have been
introduced and regulations proposed which, if enacted or finalized, respectively, would impact drug pricing and
related costs.
As a result of political, economic and regulatory influences, the health care distribution industry in the United
States is under intense scrutiny and subject to fundamental changes. We cannot predict what further reform
proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.
EU Directive on the pricing and reimbursement of medicinal products
EU law provides for the regulation of the pricing of medicinal products which are implemented by EU member
states (Directive No. 89/105/EC of 21 December 1988
relating to the transparency of measures regulating the
pricing of medicinal products for human use and their inclusion in the scope of national health insurance systems
).
Member states may, subject notably to transparency conditions and to the statement of reasons based upon
objective and verifiable criteria, regulate the price charged (or its increases) for authorized medicines and their level
of reimbursement, or they may freeze prices, place controls on the profitability of persons responsible for placing
medicinal products on the market, and include or exclude the medicine on the list of products covered by national
health insurance systems.
16
EU law does not expressly include provisions like those of the Sunshine Act in the United States, but a growing
number of EU member states (such as France since 2011) have enacted laws to increase the transparency of
relationships in the healthcare sector. The scope of these laws varies from on member state to another and may, for
example, include the relations between healthcare industry players and physicians or their associations, students
preparing for medical professions or their associations, teachers, health establishments or publishers of prescription
and dispensing assistance software.
Regulated Software; Electronic Health Records
The FDA has become increasingly active in addressing the regulation of computer software and digital health
products intended for use in health care settings. The 21st Century Cures Act (the “Cures Act”), signed into law on
December 13, 2016, among other things, amended the medical device definition to exclude certain software from
FDA regulation, including clinical decision support software that meets certain criteria. On September 27, 2019,
the FDA issued a suite of guidance documents on digital health products, which incorporated applicable Cures Act
standards, including regarding the types of clinical decision support tools and other software that are exempt from
regulation by the FDA as medical devices, and continues to issue new guidance in this area. Certain of our
businesses involve the development and sale of software and related products to support physician and dental
practice management, and it is possible that the FDA or foreign government authorities could determine that one or
more of our products is a medical device, which could subject us or one or more of our businesses to substantial
additional requirements with respect to these products.
In addition, our businesses that involve physician and dental practice management products, and our specialty home
medical supply business, include electronic information technology systems that store and process personal health,
clinical, financial and other sensitive information of individuals. These information technology systems may be
vulnerable to breakdown, wrongful intrusions, data breaches and malicious attack, which could require us to
expend significant resources to eliminate these problems and address related security concerns and could involve
claims against us by private parties and/or governmental agencies. For example, we are directly or indirectly
subject to numerous and evolving federal, state, local and foreign laws and regulations that protect the privacy and
security of personal information, such as the federal Health Insurance Portability and Accountability Act of 1996,
as amended, and implementing regulations (“HIPAA”), the Controlling the Assault of Non-Solicited Pornography
and Marketing Act, the Telephone Protection and Electronic Protection Act of 1991, Section 5 of the Federal Trade
Commission Act, the California Privacy Act (“CCPA”), and the California Privacy Rights Act (“CPRA”) that
becomes effective on January 1, 2023. Laws and regulations relating to privacy and data protection are continually
evolving and subject to potentially differing interpretations. These requirements may not be harmonized, may be
interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other
rules or our practices. Our businesses’ failure to comply with these laws and regulations could expose us to breach
of contract claims, substantial fines, penalties and other liabilities and expenses, costs for remediation and harm to
our reputation. Also, evolving laws and regulations in this area could restrict the ability of our customers to obtain,
use or disseminate patient information, or could require us to incur significant additional costs to re-design our
products to reflect these legal requirements, which could have a material adverse effect on our operations.
Also, the European Parliament and the Council of the European Union adopted the pan-European General Data
Protection Regulation (“GDPR”), effective from May 25, 2018, which increased privacy rights for individuals in
Europe (“Data Subjects”), including individuals who are our customers, suppliers and employees. The GDPR
extended the scope of responsibilities for data controllers and data processors, and generally imposes increased
requirements and potential penalties on companies, such as us, that offer goods or services to Data Subjects or
monitor their behavior (including by companies based outside of Europe). Noncompliance can result in penalties of
up to the greater of EUR 20 million, or 4% of global company revenues, and Data Subjects may seek damages. EU
member states may individually impose additional requirements and penalties regarding certain matters, such as
employee personal data. With respect to the personal data it protects, the GDPR requires, among other things,
company accountability, consents from Data Subjects or other acceptable legal basis to process the personal data,
breach notifications within 72 hours, data integrity and security, and fairness and transparency regarding the
storage, use or other processing of the personal data. The GDPR also provides rights to Data Subjects relating
notably to information, access, modification, erasure and transporting of the personal data.
17
In the United States, the CCPA, which increases the privacy protections afforded California residents, became
effective January 1, 2020. The CCPA generally requires companies, such as us, to institute additional protections
regarding the collection, use and disclosure of certain personal information of California residents. Compliance
with the new obligations imposed by the CCPA depends in part on how particular regulators interpret and apply
them, and because the CCPA is relatively new, and its implementing regulations were released in August of 2020,
there remains some uncertainty about how the CCPA will be interpreted by the courts and enforced by the
regulators. If we fail to comply with the CCPA or if regulators assert that we have failed to comply with the CCPA,
we may be subject to certain fines or other penalties and litigation, any of which may negatively impact our
reputation, require us to expend significant resources, and harm our business. Furthermore, California voters
approved the CPRA on November 3, 2020, which will amend and expand the CCPA, including by providing
consumers with additional rights with respect to their personal information, and creating a new state agency to
enforce the CCPA and the CPRA. The CPRA will come into effect on January 1, 2023, applying to information
collected by businesses on or after January 1, 2022.
Other states, as well as the federal government, have increasingly considered the adoption of similarly expansive
personal privacy laws, backed by significant civil penalties for non-compliance. While we believe we have
substantially compliant programs and controls in place to comply with the GDPR, CCPA and CPRA requirements,
our compliance with these measures is likely to impose additional costs on us, and we cannot predict whether the
interpretations of the requirements, or changes in our practices in response to new requirements or interpretations of
the requirements, could have a material adverse effect on our business.
We also sell products and services that health care providers, such as physicians and dentists, use to store and
manage patient medical or dental records. These customers, and we, are subject to laws, regulations and industry
standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of
the privacy and security of those records, and our products may also be used as part of these customers’
comprehensive data security programs, including in connection with their efforts to comply with applicable privacy
and security laws. Perceived or actual security vulnerabilities in our products or services, or the perceived or actual
failure by us or our customers who use our products or services to comply with applicable legal or contractual data
privacy and security requirements, may not only cause us significant reputational harm, but may also lead to claims
against us by our customers and/or governmental agencies and involve substantial fines, penalties and other
liabilities and expenses and costs for remediation.
Various federal initiatives involve the adoption and use by health care providers of certain electronic health care
records systems and processes. The initiatives include, among others, programs that incentivize physicians and
dentists, through MIPS, to use EHR technology in accordance with certain evolving requirements, including
regarding quality, promoting interoperability, cost and improvement activities. Qualification for the MIPS
incentive payments requires the use of EHRs that are certified as having certain capabilities designated in evolving
standards adopted by CMS and by the Office of the National Coordinator for Health Information Technology of
HHS (“ONC”). Certain of our businesses involve the manufacture and sale of such certified EHR systems and
other products linked to government supported incentive programs. In order to maintain certification of our EHR
products, we must satisfy these changing governmental standards. If any of our EHR systems do not meet these
standards, yet have been relied upon by health care providers to receive federal incentive payments, we may be
exposed to risk, such as under federal health care fraud and abuse laws, including the False Claims Act. For
example, on May 31, 2017, the U.S. Department of Justice announced a $155 million settlement and 5-year
corporate integrity agreement involving a vendor of certified EHR systems, based on allegations that the vendor, by
misrepresenting capabilities to the certifying body, caused its health care provider customers to submit false
Medicare and Medicaid claims for meaningful use incentive payments in violation of the False Claims Act.
Moreover, in order to satisfy our customers, our products may need to incorporate increasingly complex
functionality, such as reporting functionality. Although we believe we are positioned to accomplish this, the effort
may involve increased costs, and our failure to implement product modifications, or otherwise satisfy applicable
standards, could have a material adverse effect on our business.
Other health information standards, such as regulations under HIPAA, establish standards regarding electronic
health data transmissions and transaction code set rules for specific electronic transactions, such as transactions
involving claims submissions to third party payers. Failure to abide by these and other electronic health data
18
transmission standards could expose us to breach of contract claims, substantial fines, penalties, and other liabilities
and expenses, costs for remediation and harm to our reputation.
Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the
ability of these connected systems to safely and effectively exchange and use exchanged information becomes
increasingly important. For example, on September 6, 2017, the FDA issued final guidance to assist industry in
identifying specific considerations related to the ability of electronic medical devices to safely and effectively
exchange and use exchanged information. As a medical device manufacturer, we must manage risks including
those associated with an electronic interface that is incorporated into a medical device.
There may be additional legislative or regulatory initiatives in the future impacting health care.
E-Commerce
Electronic commerce solutions have become an integral part of traditional health care supply and distribution
relationships. Our distribution business is characterized by rapid technological developments and intense
competition. The continuing advancement of online commerce requires us to cost-effectively adapt to changing
technologies, to enhance existing services and to develop and introduce a variety of new services to address the
changing demands of consumers and our customers on a timely basis, particularly in response to competitive
offerings.
Through our proprietary, technologically-based suite of products, we offer customers a variety of competitive
alternatives. We believe that our tradition of reliable service, our name recognition and large customer base built
on solid customer relationships, position us well to participate in this significant aspect of the distribution business.
We continue to explore ways and means to improve and expand our Internet presence and capabilities, including
our online commerce offerings and our use of various social media outlets.
International Transactions
United States and foreign import and export laws and regulations require us to abide by certain standards relating to
the importation and exportation of products. We also are subject to certain laws and regulations concerning the
conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, German
anti-corruption laws and other anti-bribery laws and laws pertaining to the accuracy of our internal books and
records, as well as other types of foreign requirements similar to those imposed in the United States.
While we believe that we are substantially compliant with the foregoing laws and regulations promulgated
thereunder and possess all material permits and licenses required for the conduct of our business, there can be no
assurance that regulations that impact our business or customers’ practices will not have a material adverse effect
on our business.
See “
” for a discussion of additional burdens, risks and regulatory developments that may
affect our results of operations and financial condition.
Proprietary Rights
We hold trademarks relating to the “Henry Schein
®
” name and logo, as well as certain other trademarks. We intend
to protect our trademarks to the fullest extent practicable.
19
Employees and Human Capital
At Henry Schein, our employees are our greatest asset. We employ more than 19,000 full-time equivalent
employees, including approximately 2,250 telesales representatives, over 3,450 field sales consultants, including
equipment sales specialists, 2,000 installation and repair technicians, 3,550 warehouse employees, 800 computer
programmers and technicians, 675 management employees and 6,300 office, clerical and administrative employees.
Approximately 49% of our workforce is based in the United States and approximately 51% is based outside of the
United States.
Approximately 13% of our employees are subject to collective bargaining agreements. We believe
that our relations with our employees are excellent.
We refer to our employees as Team Schein Members, or “TSMs.” Our TSMs are the cornerstone of the Company.
Our success is built on the engagement and commitment of our team, which is dedicated to meeting the needs of
our customers, supplier partners, fellow TSMs, stockholders and society. We are committed to supporting the
personal and professional development of our TSMs, as well as providing competitive benefits and a safe, inclusive
workplace, and believe that these measures help us to retain our TSMs and attract new TSMs. As part of this
commitment, we have, among other things:
•
Developed a strong collaborative workplace culture.
communicate and cooperate across functional and departmental teams positively impacts our performance.
Each TSM’s performance is evaluated annually, based on a measure of Team Schein values, with a focus
on open communication. Our team’s performance as a whole is evaluated via a culture survey, conducted
every two years, distributed to all TSMs, which, among other things, addresses collaboration. The results
from our culture surveys are reviewed by senior leaders, reported to the Board of Directors and used to
implement programs and processes designed to further enhance our culture. We are currently in the
process of further developing our collaborative culture by, among other things, strengthening our existing
commitment to diversity and inclusion, as further described below.
•
Committed to enhance our Diversity and Inclusion (“D&I”) initiatives.
fosters innovation and cultivates an environment filled with unique perspectives. As a result, D&I helps us
meet the needs of customers around the world. We collect feedback through hosting roundtables where our
senior leaders actively listen to our TSMs on topics related to D&I, and the insights learned are used to
guide our efforts to support a diverse and inclusive environment. To guide our efforts and education
related to D&I, we have established an Executive Diversity and Inclusion Council with engagement from
our Board of Directors and Executive Management Committee. This Council drives the Company’s overall
D&I strategy. In 2020, we launched a D&I learning program to educate our TSMs on critical D&I related
topics, and management is incentivized to advance our D&I efforts. Additionally, we promote engagement
by utilizing our Employee Resource Groups as an inclusive and diverse vehicle for all TSMs to share,
connect, learn, and develop both personally and professionally. We believe that these efforts will serve as a
critical stepping stone as we continue to strengthen our D&I initiatives in an effort to meet the evolving
needs of our customers, supplier partners, TSMs, stockholders and society.
•
Committed to the professional development of our TSMs.
and provide formal and informal learning opportunities to our TSMs. All TSMs globally are offered a
broad suite of talent and professional development training programs targeted to specific learning
opportunities based on their current and potential future role within the Company. We also offer over 50
organizational and development training courses designed to aid in the overall development and
advancement of skills and competencies to enable organizational success.
•
Supported talent development and succession planning.
commitment to ensure a strong leadership pipeline across the organization. We continuously identify a
group of potential management successors as part of our succession planning process. Our senior leaders
work to develop our TSMs’ talent and focus the team to execute our long-term strategic plans. Our Board
of Directors is provided with periodic updates regarding our talent development and succession planning
efforts, participates in professional development activities with our TSMs and receives formal
documentation on these topics annually.
20
•
Supported TSM health and safety.
eligible TSMs. In addition to employee health, we are committed to providing a safe and secure work
environment for all TSMs. In response to the COVID-19 pandemic, in March 2020, we implemented
certain policy and procedure changes in an effort to protect our TSMs and customers, and to support
appropriate health and safety protocols. While TSMs at our manufacturing and distribution facilities, as
well as field sales consultants and equipment service technicians, have continued to work onsite or in the
field to provide vital services to our customers, most TSMs in administrative functions have effectively
worked remotely since mid-March. To support the health and safety of our TSMs, we, among other things,
implemented extensive cleaning and sanitation processes and face mask policies to protect TSMs at our
manufacturing and distribution facilities, instituted social distancing and face mask policies for our field
sales consultants and equipment service technicians and adopted broad work-from-home initiatives for
TSMs in administrative functions. In connection with this shift to remote working, we made investments in
equipment, technology, and security upgrades to help protect our information and enhance our team’s
ability to work remotely. Additionally, to help the team manage stress during the pandemic, we, among
other things, established a “COVID-19 Resource Center” to provide a central location for all
communications to support the health of TSMs and their families, and hold virtual Global Town Halls for
all TSMs.
Available Information
We make available free of charge through our Internet website,
www.henryschein.com
, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of beneficial ownership of
securities on Forms 3, 4 and 5 and amendments to these reports and statements filed or furnished pursuant to
Section 13(a) and Section 16 of the Securities Exchange Act of 1934 as soon as reasonably practicable after such
materials are electronically filed with, or furnished to, the United States Securities and Exchange Commission, or
SEC. Our principal executive offices are located at 135 Duryea Road, Melville, New York 11747, and our
telephone number is (631) 843-5500. Unless the context specifically requires otherwise, the terms the “Company,”
“Henry Schein,” “we,” “us” and “our” mean Henry Schein, Inc., a Delaware corporation, and its consolidated
subsidiaries.
21
Information about our Executive Officers
The following table sets forth certain information regarding our executive officers:
Name
Age
Position
Stanley M. Bergman
71
Chairman, Chief Executive Officer, Director
Gerald A. Benjamin
68
Executive Vice President, Chief Administrative Officer, Director
James P. Breslawski
67
Vice Chairman, President, Director
Michael S. Ettinger
59
Senior Vice President, Corporate & Legal Affairs and Chief of Staff, Secretary
Mark E. Mlotek
65
Executive Vice President, Chief Strategic Officer, Director
Steven Paladino
63
Executive Vice President, Chief Financial Officer, Director
Walter Siegel
61
Senior Vice President and General Counsel
Stanley M. Bergman
Mr. Bergman held the position of President from 1989 to 2005. Mr. Bergman held the position of Executive Vice
President from 1985 to 1989 and Vice President of Finance and Administration from 1980 to 1985.
Gerald A. Benjamin
director since 1994. Prior to holding his current position, Mr. Benjamin was Senior Vice President of
Administration and Customer Satisfaction since 1993. Mr. Benjamin was Vice President of Distribution
Operations from 1990 to 1992 and Director of Materials Management from 1988 to 1990. Before joining us in
1988, Mr. Benjamin was employed for 12 years at Estée Lauder, Inc., in various management positions where his
last position was Director of Materials Planning and Control.
James P. Breslawski
Breslawski was the Chief Executive Officer of our Henry Schein Global Dental Group from 2005 to 2018. Mr.
Breslawski held the position of Executive Vice President and President of U.S. Dental from 1990 to 2005, with
primary responsibility for the North American Dental Group. Between 1980 and 1990, Mr. Breslawski held
various positions with us, including Chief Financial Officer, Vice President of Finance and Administration and
Corporate Controller.
Michael S. Ettinger
since 2015. Prior to his current position, Mr. Ettinger served as Senior Vice President, Corporate & Legal Affairs
and Secretary from 2013 to 2015, Corporate Senior Vice President, General Counsel & Secretary from 2006 to
2013, Vice President, General Counsel and Secretary from 2000 to 2006, Vice President and Associate General
Counsel from 1998 to 2000 and Associate General Counsel from 1994 to 1998. Before joining us, Mr. Ettinger
served as a senior associate with Bower & Gardner and as a member of the Tax Department at Arthur Andersen.
Mark E. Mlotek
Senior Vice President and subsequently Executive Vice President of the Corporate Business Development Group
between 2000 and 2012. Prior to that, Mr. Mlotek was Vice President, General Counsel and Secretary from 1994 to
1999 and became a director in 1995. Prior to joining us, Mr. Mlotek was a partner in the law firm of Proskauer
Rose LLP, counsel to us, specializing in mergers and acquisitions, corporate reorganizations and tax law from 1989
to 1994.
Steven Paladino
his current position, Mr. Paladino was Senior Vice President and Chief Financial Officer from 1993 to 2000 and
has been a director since 1992. From 1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from
1987 to 1990 served as Corporate Controller. Before joining us, Mr. Paladino was employed in public accounting
for seven years, most recently with the international accounting firm of BDO USA, LLP. Mr. Paladino is a
certified public accountant.
22
Walter Siegel
was employed with Standard Microsystems Corporation, a publicly traded global semiconductor company from
2005 to 2012, holding positions of increasing responsibility, most recently as Senior Vice President, General
Counsel and Secretary.
Other Executive Management
The following table sets forth certain information regarding other Executive Management:
Name
Age
Position
David Brous
52
President, Strategic Business Units Group and Asia Pacific & Brazil Dental
Brad Connett
62
President, U.S. Medical Group
Jonathan Koch
46
Senior Vice President and Chief Executive Officer, Global Dental Group
Lorelei McGlynn
57
Senior Vice President, Chief Human Resources Officer
James Mullins
56
Senior Vice President, Global Services
Christopher Pendergast
58
Senior Vice President and Chief Technology Officer
Michael Racioppi
66
Senior Vice President, Chief Merchandising Officer
René Willi, Ph.D.
53
President, Global Dental Surgical Group
David Brous
Mr. Brous joined us in 2002 and has held many positions within the organization, including leading and managing
the Corporate Business Development Group and the International Healthcare Group (managing our International
Animal Health business, International Medical business and Australia / New Zealand Dental business).
Brad Connett
has held a number of increasingly responsible positions at the Company. Throughout his career, he has received
numerous industry honors, including the John F. Sasen Leadership Award from the Health Industry Distributors
Association (HIDA), in recognition of his service to the industry, and induction into the Medical Distribution Hall
of Fame by Repertoire Magazine.
Jonathan Koch
2018. Prior to joining us, for the years 2006 to 2018, Mr. Koch was a senior executive at Covance, the drug
development services business of Laboratory Corporation of America. In his last role at Covance, Mr. Koch was
the Executive Vice President and Group President of Covance Clinical Development & Commercialization
Services. Prior to that, Mr. Koch was Executive Vice President and Group President of Covance Research and
Development Laboratories from 2015 to 2017. Mr. Koch was also President of Covance Central Laboratory
Services from 2010 to 2015, and Vice President at Covance, with various responsibilities, from 2006 to 2010. Prior
to Covance, Mr. Koch held senior leadership roles of increasing responsibility while employed with Charles River
Laboratories from 1998 to 2006.
Lorelei McGlynn
us in 1999, Ms. McGlynn has served as Vice President, Global Human Resources and Financial Operations from
2008 to 2013, Chief Financial Officer, International Group and Vice President of Global Financial Operations from
2002 to 2008 and Vice President, Finance, North America from 1999 to 2002. Prior to joining us, Ms. McGlynn
served as Assistant Vice President of Finance at Adecco Corporation.
James Mullins
and has held a number of key positions with increasing responsibility, including Global Chief Customer Service
Officer.
23
Christopher Pendergast
joining us, Mr. Pendergast was the employed by VSP Global from 2008 to 2018, most recently as the Chief
Technology Officer and Chief Information Officer. Prior to VSP Global, Mr. Pendergast served in roles of
increasing responsibility at Natural Organics, Inc., from 2006 to 2008, IdeaSphere Inc./Twinlab Corporation from
2000 to 2006, IBM Corporation from 1987 to 1994 and 1998 to 2000 and Rohm and Haas from 1994 to 1998.
Michael Racioppi
his current position, Mr. Racioppi was President of the Medical Division from 2000 to 2008 and Interim President
from 1999 to 2000, and Corporate Vice President from 1994 to 2008, with primary responsibility for the Medical
Group, Marketing and Merchandising departments. Mr. Racioppi served as Senior Director, Corporate
Merchandising from 1992 to 1994. Before joining us in 1992, Mr. Racioppi was employed by Ketchum
Distributors, Inc. as the Vice President of Purchasing and Marketing. He currently serves on the board of National
Distribution and Contracting and previously served on the board of Health Distribution Management Association
and Health Industry Distributors Association (HIDA).
René Willi, Ph.D.
joining Henry Schein, Dr. Willi held senior level roles with Institut Straumann AG as Executive Vice President,
Surgical Business Unit from 2005 to 2013. Prior to Straumann, he held roles of increasing responsibility in
Medtronic Plc’s cardiovascular division from 2003 to 2005 and with McKinsey & Company as a management
consultant from 2000 to 2003.
24
ITEM 1A. Risk Factors
Our business operations could be affected by factors that are not presently known to us or that we currently
consider not to be material to our operations, so you should not consider the risks disclosed in this section to
necessarily represent a complete statement of all risks and uncertainties. The Company believes that the following
risks could have a material adverse impact on our business, reputation, financial results, financial condition and/or
the trading price of our common stock. The order in which these factors appear does not necessarily reflect their
relative importance or priority.
COMPANY RISKS
Our business, results of operations, cash flows, financial condition and liquidity may be negatively impacted by
the effects of disease outbreaks, epidemics, pandemics, or similar wide-spread public health concerns and other
natural disasters
.
The COVID-19 pandemic and the responses of governments to it had, and may again have, a
material adverse effect on our business, results of operations and cash flows and may result in a material
adverse effect on our financial condition and liquidity.
Our business, results of operations, cash flows, financial condition and liquidity may be negatively impacted by the
effects of disease outbreaks, epidemics, pandemics, similar wide-spread public health concerns, and other natural
disasters. The COVID-19 pandemic has had, and continues to have, an unprecedented impact on society, worldwide
economic activity, and the health care sector (particularly, the dental market). As a global healthcare solutions
company, the COVID-19 pandemic and the governmental responses to it had, and may again have, a material
adverse effect on our business, results of operations and cash flows and may result in a material adverse effect on
our financial condition and liquidity. In March and April 2020, the dental market was severely impacted by
COVID-19, with many, if not a majority, of practices being closed or open on a limited basis only. Although dental
practice openings and patient volume recovery in the United States and many other countries have rebounded faster
than originally anticipated, patient volumes have remained below pre-COVID-19 levels. Material uncertainty
remains and the potential for additional significant resurgences of COVID-19 could cause a significant reduction in
dental practice openings and patient volume recovery, or further delay the return to normal operations. Even after
COVID-19 has subsided, we may again experience material adverse impacts to our business, results of operations
and cash flows as a result of, among other things, its global economic impact, including any recession that may
occur in the future, or a prolonged period of economic slowdown or the reluctance of patients to return for elective
dental or medical care. The impacts and potential impacts from the COVID-19 pandemic include, but are not
limited to:
•
Significant reductions in demand or significant volatility in demand for certain of our products.
March and April 2020, many dental offices in the United States performed only emergency procedures, and
rescheduled wellness exams and elective procedures. Dental offices in other countries also experienced closures or
restricted operations, as did medical offices around the world. Such closures and restrictions impacted our
customers’ spending with us and had, and if reinstated may again have, a material adverse effect on our business,
results of operations and cash flows. Although dental practice openings and patient volume recovery have
rebounded faster than originally anticipated, capacity constraints in offices and demand-side factors may again lead
to reductions in demand or significant volatility in demand for our products. Additionally, significant reduction in
demand for certain of our products or customers’ decisions to delay the purchase of large equipment may result in
us having increased inventory;
•
Shortage of Certain Personal Protective Equipment (PPE
). Supply chain disruptions for PPE and an increased
demand for these products has resulted, and may continue to result, in backorders of certain PPE and a potential
scarcity in raw materials to make certain PPE. Prices for certain PPE have been volatile. Although we believe that
most practices currently are able to access adequate supply, with some exceptions in certain markets depending on
a number of factors, including the progress of the virus and efforts to combat it, we still may be unable to supply
our customers with the quantity of certain PPE products they demand, which may lead to our customers seeking
alternative sources of supply. Furthermore, healthcare professionals’ inability to obtain a sufficient quantity of
certain PPE would adversely impact our business, results of operations and cash flows, and could materially
adversely affect our financial condition and liquidity. Conversely, we recorded significant charges throughout the
year beginning in the second quarter for PPE inventory due to volatility of pricing for PPE, and, depending upon
25
the course of the pandemic, if PPE pricing or demand decreases, our margins and the value of certain our PPE
inventory could be further negatively impacted in future periods, which could result in a material adverse impact on
our business, results of operations and cash flows and our financial condition and liquidity;
•
Reduction in Peoples’ Ability and Willingness to be in Public.
organizations, and implemented by many local governments, to slow and limit the transmission of COVID-19
(including business closures and restrictions, stay-at-home and similar measures) were implemented and then lifted
or partially lifted in some locations and reinstituted in others. Ongoing social distancing ordinances and similar
restrictions, and the actual and potential for additional resurgences of COVID-19 has in some locations and may in
other locations result in the re-imposition or tightening of governmental social distancing and other restrictions,
and/or cause people to be less willing to go to elective medical and dental appointments, which could again
materially adversely affect demand for our products. A lengthened period of materially suppressed demand could
again cause material adverse impacts on our business, results of operations and cash flows and could materially
adversely affect our financial condition and liquidity;
•
Potential delays in customer payments, or defaults on our customer credit arrangements.
products to customers with payment terms. If customers’ cash flows or operating and financial performance
deteriorate due to the impact of COVID-19, or if they are unable to make scheduled payments or obtain credit, they
may not be able to pay, or may delay payment to us. Likewise, for similar reasons, suppliers may restrict credit or
impose more stringent payment terms. The inability of current and/or potential customers to pay us for our products
and/or services or any demands by suppliers for more stringent payment terms may materially adversely affect our
business, results of operations, cash flows, financial condition and liquidity and may limit the amounts we can
borrow under our trade accounts receivable securitization;
•
Impact on third parties’ ability to meet their obligations to us; impact on our ability to meet obligations to third
parties.
contractors (including third-party shippers), banks, joint venture partners and external business partners, to meet
their obligations to us, or significant disruptions in their ability to do so, which may be caused by their own
financial or operational difficulties, or by travel restrictions and border closures, may materially adversely affect
our business, results of operations, cash flows, financial condition and liquidity. Certain of our contracts with
supply partners contain minimum purchase requirements or include rebate provisions if we satisfy certain sales or
purchasing targets that, in certain cases we have not been able to satisfy and in other cases we may not be able to
fully satisfy, due to the impact of the COVID-19 pandemic. Rebate income recognized in fiscal 2020 is less than
rebates earned over the prior fiscal year. Our failure to satisfy such contractual provisions or renegotiate more
favorable terms could materially adversely affect our business, results of operations and cash flows;
•
Negative impact on our workforce and impact of adapted business practices.
to implement temporary cost reduction measures (including a payroll cost reduction plan centered around
furloughs, reduced pay and work hours, voluntary unpaid time off, suspension of Company contributions to certain
retirement plans and job reductions), all of which have now ended (except for a small number of TSMs who remain
on furlough), modify our business practices (including employee travel, employee work locations, and cancellation
of physical participation in meetings, events and conferences), and we may take further actions as may be required
by government authorities or that we determine are in the best interests of our employees. As the COVID-19
pandemic continues to unfold, we will continue to evaluate appropriate actions for our business. Many of our
employees shifted abruptly to working remotely and our non-essential workers who are able to work from home
continue to do so. An extended period of modified business practices and remote work arrangements could have a
negative impact on employee morale, strain our business continuity plans, introduce operational risk (including but
not limited to cybersecurity risks), and impair our ability to efficiently operate our business;
•
Significant changes in political conditions.
purchase and distribute our products have occurred and are expected to continue at least during the pendency of the
pandemic, including quarantines, governmental or regulatory actions, closures or other restrictions that limit or
close our operating facilities, restrict our employees’ ability to travel or perform necessary business functions, or
otherwise constrain the operations of our business partners, suppliers, or customers, which may materially
adversely affect our business, results of operations, cash flows, financial condition and liquidity;
26
•
Potential impact on our ability to meet obligations under credit facilities.
amendments to our material credit facilities to, among other things, extend the maturity dates and temporarily
provide additional flexibility under certain covenants, an extended negative impact of COVID-19 on our business,
results of operations, cash flows, financial condition and liquidity could impact our ability to meet our obligations
under credit facilities or outstanding long term debt, which contain maximum leverage ratios, and customary
representations, warranties and affirmative covenants;
•
Volatility in the financial markets.
availability and cost of credit to us;
•
Refocusing management resources to mitigate effects of COVID-19
. Our management is focused on mitigating the
effects of COVID-19, which has required, and may continue to require for the duration of the pandemic, a large
investment of time and resources across the Company, and may delay certain strategic and other plans, which could
materially adversely affect our business;
•
Potential
increased costs associated with our self-insured medical insurance programs.
We may incur significant
employee health care costs under our self-insurance medical insurance programs if a large number of our
employees and/or their covered family members become ill from COVID-19; and
•
Reputational risk associated with response to COVID-19.
pandemic, or if customers do not perceive our response to be adequate, we could suffer damage to our reputation
and our brands, which could materially adversely affect our business.
The impact of COVID-19 may also exacerbate other risks discussed below, any of which could have a material
adverse effect on us.
We are dependent upon third parties for the manufacture and supply of substantially all of our products.
We obtain substantially all of the products we distribute from third parties, with whom we generally do not have
long-term contracts. While there is typically more than one source of supply, some key suppliers, in the aggregate,
supply a significant portion of the products we sell. In 2020, our top 10 health care distribution suppliers and our
single largest supplier accounted for approximately 30% and 4%, respectively, of our aggregate purchases.
Because of our dependence upon such suppliers, our operations are subject to the suppliers’ ability and willingness
to supply products in the quantities that we require, and the risks include delays caused by interruption in
production based on conditions outside of our control, including a supplier’s failure to comply with applicable
government requirements (which may result in product recalls and/or cessation of sales) or an interruption in the
suppliers’ manufacturing capabilities. In the event of any such interruption in supply, we would need to identify and
obtain acceptable replacement sources on a timely basis. There is no guarantee that we would be able to obtain such
alternative sources of supply on a timely basis, if at all, and an extended interruption in supply, particularly of a
high sales volume product, could result in a significant disruption in our sales and operations, as well as damage to
our relationships with customers and our reputation.
Our future growth (especially for our technology and value-added services segment) is dependent upon our
ability to develop or acquire and maintain and protect new products and technologies that achieve market
acceptance with acceptable margins.
Our future success depends on our ability to timely develop (or obtain the right to sell) competitive and innovative
(particularly for our technology and value-added services segment), products and services and to market them
quickly and cost-effectively. Our ability to anticipate customer needs and emerging trends and develop or acquire
new products, services and technologies at competitive prices requires significant resources, including employees
with the requisite skills, experience and expertise, particularly in our technology segment, including dental practice
management, patient engagement and demand creation software solutions. The failure to successfully address these
challenges could materially disrupt our sales and operations. Additionally, our software and e-services products,
like software products generally, may contain undetected errors or bugs when introduced or as new versions are
released. Any such defective software may result in increased expenses related to the software and could adversely
affect our relationships with customers as well as our reputation. While certain software and e-services that we
27
develop are protected under patent law, we rely primarily upon copyright, trademark and trade secret laws, as well
as contractual and common law protections and confidentiality obligations. We cannot provide assurance that such
legal protections will be available, adequate or enforceable in a timely manner to protect our software or e-services
products.
Our expansion through acquisitions and joint ventures involves risks and may not result in the benefits and
revenue growth we expect.
One of our business strategies has been to expand our domestic and international markets in part through
acquisitions and joint ventures, and we expect to continue to make acquisitions and enter into joint ventures in the
future. Such transactions require significant management attention, may place significant demands on our
operations, information systems and financial resources, and there is risk that one or more may not succeed. We
cannot be sure, for example, that we will achieve the benefits of revenue growth that we expect from these
acquisitions or joint ventures or that we will avoid unforeseen additional costs or expenses. Our ability to
successfully implement our acquisition and joint venture strategy depends upon, among other things, the following:
•
the availability of suitable acquisition or joint venture candidates at acceptable prices;
•
our ability to consummate such transactions, which could potentially be prohibited due to U.S. or
foreign antitrust regulations;
•
the liquidity of our investments and the availability of financing on acceptable terms;
•
our ability to retain customers or product lines of the acquired businesses or joint ventures;
•
our ability to retain, recruit and incentivize the management of the companies we acquire; and
•
our ability to successfully integrate these companies’ operations, services, products and personnel with
our culture, management policies, internal procedures, working capital management, financial and
operational controls and strategies.
Furthermore, some of our acquisitions and future acquisitions may give rise to an obligation to make contingent
payments or to satisfy certain repurchase obligations, which payments could have material adverse impacts on our
financial results individually or in the aggregate.
Certain provisions in our governing documents and other documents to which we are a party may discourage
third parties from seeking to acquire us that might otherwise result in our stockholders receiving a premium
over the market price of their shares.
The provisions of our certificate of incorporation and by-laws may make it more difficult for a third-party to
acquire us, may discourage acquisition bids and may impact the price that certain investors might be willing to pay
in the future for shares of our common stock. These provisions, among other things require:
•
approve a merger, consolidation, or a sale, lease, transfer or exchange of all or substantially all of our
assets; and
•
remove a director; and (ii) to amend or repeal our by-laws, with certain limited exceptions.
In addition, certain of our employee incentive plans provide for accelerated vesting of stock options and other
awards upon termination without cause within two years following a change in control, or grant the plan committee
discretion to accelerate awards upon a change of control. Further, certain agreements between us and our executive
officers provide for increased severance payments and certain benefits if those executive officers are terminated
without cause by us or if they terminate for good reason, in each case within two years following a change in
control or within ninety days prior to the effective date of the change in control or after the first public
announcement of the pendency of the change in control.
28
INDUSTRY RISKS
The health care products distribution industry is highly competitive (including, without limitation, competition
from third-party online commerce sites) and consolidating, and we may not be able to compete successfully.
We compete with numerous companies, including several major manufacturers and distributors. Some of our
competitors have greater financial and other resources than we do, which could allow them to compete more
successfully. Most of our products are available from several sources and our customers tend to have relationships
with several distributors. Competitors could obtain exclusive rights to market particular products, which we would
then be unable to market. Manufacturers also could increase their efforts to sell directly to end-users and thereby
eliminate or reduce our role in distribution. Industry consolidation among health care product distributors and
manufacturers, price competition, product unavailability, whether due to our inability to gain access to products or
to interruptions in manufacturing supply, or the emergence of new competitors, also could increase competition.
Consolidation has also increased among manufacturers of health care products, which could have a material
adverse effect on our margins and product availability. We could be subject to charges and financial losses in the
event we fail to satisfy minimum purchase commitments contained in some of our contracts. Additionally,
traditional health care supply and distribution relationships are being challenged by electronic online commerce
solutions. The continued advancement of online commerce by third parties will require us to cost-effectively adapt
to changing technologies, to enhance existing services and to differentiate our business (including with additional
value-added services) to address changing demands of consumers and our customers on a timely basis. The
emergence of such potential competition and our inability to anticipate and effectively respond to changes on a
timely basis could have a material adverse effect on our business.
The repeal or judicial prohibition on implementation of the Affordable Care Act could materially adversely
affect our business.
The U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation
Act, each enacted in March 2010, as amended (the “ACA”), greatly expanded health insurance coverage in the
United States and has been the target of litigation and Congressional reform efforts since its adoption. The U.S.
Supreme Court, in upholding the constitutionality of the ACA and its individual mandate provision in 2012,
simultaneously limited ACA provisions requiring Medicaid expansion, making such expansion a state-by-state
decision. In 2017, the U.S. Congress effectively repealed the ACA’s individual mandate provision by eliminating
the financial penalty for non-compliance. In the most recent ACA litigation, a federal appeals court found the
individual mandate to be unconstitutional, and returned the case to a lower federal court for consideration of
whether the remainder of the ACA could survive the excision of the individual mandate. This decision was
appealed to the U.S. Supreme Court, and a decision is expected soon. Any outcome of this case that changes the
ACA, in addition to future legislation, regulation, guidance and/or Executive Orders that do the same, could have a
significant impact on the U.S. healthcare industry and our operations.
The health care industry is experiencing changes due to political, economic and regulatory influences that could
materially adversely affect our business.
The health care industry is highly regulated and subject to changing political, economic and regulatory influences.
In recent years, the health care industry has undergone, and is in the process of undergoing, significant changes
driven by various efforts to reduce costs, including, among other factors: trends toward managed care; collective
purchasing arrangements and consolidation among office-based health care practitioners; and changes in
reimbursements to customers, including increased attention to value-based payment arrangements, as well as
growing enforcement activities (and related monetary recoveries) by governmental officials. Both our profitability
and the profitability of our customers may be materially adversely affected by laws and regulations reducing
reimbursement rates for pharmaceuticals, medical supplies and devices, and/or medical treatments or services, or
changes to the methodology by which reimbursement levels are determined. If we are unable to react effectively to
these and other changes in the health care industry, our business could be materially adversely affected.
29
Expansion of group purchasing organizations (“GPO”) or provider networks and the multi-tiered costing
structure may place us at a competitive disadvantage.
The medical products industry is subject to a multi-tiered costing structure, which can vary by manufacturer and/or
product. Under this structure, certain institutions can obtain more favorable prices for medical products than we are
able to obtain. The multi-tiered costing structure continues to expand as many large integrated health care providers
and others with significant purchasing power, such as GPOs, demand more favorable pricing terms. Additionally,
the formation of provider networks and GPOs may shift purchasing decisions to entities or persons with whom we
do not have a historical relationship and may threaten our ability to compete effectively, which could in turn
negatively impact our financial results. Although we are seeking to obtain similar terms from manufacturers to
access lower prices demanded by GPO contracts or other contracts, and to develop relationships with existing and
emerging provider networks and GPOs, we cannot guarantee that such terms will be obtained or contracts executed.
Increases in shipping costs or service issues with our third-party shippers could harm our business.
Shipping is a significant expense in the operation of our business. We ship almost all of our orders through third-
party delivery services, and typically bear the cost of shipment. Accordingly, any significant increase in shipping
rates could have a material adverse effect on our business, financial condition or operating results. Similarly, strikes
or other service interruptions by those shippers could cause our operating expenses to rise and materially adversely
affect our ability to deliver products on a timely basis.
MACRO ECONOMIC AND POLITICAL RISKS
Uncertain global macro-economic and political conditions could materially adversely affect our results of
operations and financial condition.
Uncertain global macro-economic and political conditions that affect the economy and the economic outlook of the
United States, Europe, Asia and other parts of the world could materially adversely affect our results of operations
and financial condition. These uncertainties, include, among other things:
•
election results;
•
changes to laws and policies governing foreign trade (including, without limitation, the United States-
Mexico-Canada Agreement (USMCA), the EU-UK Trade and Cooperation Agreement of December
2020, and other international trade agreements);
•
greater restrictions on imports and exports;
•
supply chain disruptions due to social issues;
•
changes in laws and policies governing health care or data privacy;
•
tariffs and sanctions;
•
changes to the relationship between the United States and China;
•
sovereign debt levels;
•
the inability of political institutions to effectively resolve actual or perceived economic, currency or
budgetary crises or issues;
•
consumer confidence;
•
unemployment levels (and a corresponding increase in the uninsured and underinsured population);
•
changes in regulatory and tax regulations;
•
increases in interest rates;
•
availability of capital;
•
increases in fuel and energy costs;
•
the effect of inflation on our ability to procure products and our ability to increase prices over time;
•
changes in tax rates and the availability of certain tax deductions;
•
increases in health care costs;
•
the threat or outbreak of war, terrorism or public unrest; and
•
changes in laws and policies governing manufacturing, development and investment in territories and
countries where we do business.
30
Additionally, changes in government, government debt and/or budget crises may lead to reductions in government
spending in certain countries, which could reduce overall health care spending, and/or higher income or corporate
taxes, which could depress spending overall. Recessionary conditions and depressed levels of consumer and
commercial spending may also cause customers to reduce, modify, delay or cancel plans to purchase our products
and may cause suppliers to reduce their output or change their terms of sale. We generally sell products to
customers with payment terms. If customers’ cash flow or operating and financial performance deteriorate, or if
they are unable to make scheduled payments or obtain credit, they may not be able to, or may delay, payment to us.
Likewise, for similar reasons suppliers may restrict credit or impose different payment terms.
REGULATORY AND LITIGATION RISKS
Failure to comply with existing and future regulatory requirements could materially adversely affect our
business.
The laws and regulations that govern our business and operations are subject to varying and evolving
interpretations, future changes, additions, and enforcement approaches (including in light of political changes, such
as with respect to the new administration of President Biden) that affect our ability to comply. For example,
President Biden’s administration has authorized and encouraged a freeze on certain federal regulations that have
been published but are not yet effective, as well as a review of all federal regulations issued during President
Trump’s administration. Changes with respect to the applicable laws and regulations may require us to update or
revise our operations, services, marketing practices, and compliance programs and controls, and may impose
additional and unforeseen costs on us, pose new or previously immaterial risks to us, or may otherwise have a
material adverse effect on our business. There can be no assurance that current and future government regulations
will not adversely affect our business, and we cannot predict new regulatory priorities, the form, content or timing
of regulatory actions, and their impact on the health care industry and on our business and operations.
Global efforts toward healthcare cost containment continue to exert pressure on product pricing. In the United
States, in addition to other government efforts to control health care costs, there has been increased scrutiny on drug
pricing and concurrent efforts to control or reduce drug costs by Congress, the President, executive branch agencies
and various states. At the state level, several states have adopted laws that require drug manufacturers to provide
advance notice of certain price increases and to report information relating to those price increases, while others
have taken legislative or administrative action to establish prescription drug affordability boards or multi-payer
purchasing pools to reduce the cost of prescription drugs. At the federal level, several related bills have been
introduced and regulations proposed which, if enacted or finalized, respectively, would impact drug pricing and
related costs.
Under the Physician Payment Sunshine Act, we are required to collect and report detailed information regarding
certain financial relationships we have with covered recipients, such as physicians, dentists and teaching hospitals.
We or our subsidiaries may be required to report information under certain state transparency laws that address
circumstances not covered by the Physician Payment Sunshine Act, and some of these state laws, as well as the
federal law, can be ambiguous. We are also subject to foreign regulations requiring transparency of certain
interactions between suppliers and their customers. While we believe we have substantially compliant programs
and controls in place satisfying the above laws and requirements, such compliance imposes additional costs on us
and the requirements are sometimes ambiguous. In the United States, government actions to seek to increase
health-related price transparency may also affect our business.
31
Our business is subject to additional requirements under various local, state, federal and international laws and
regulations applicable to the sale and distribution of, and third-party payment for, pharmaceuticals and medical
devices, human cells, tissue and cellular and tissue-based products (“HCT/P products”). Among the federal laws
with which we must comply are the Controlled Substances Act, the U.S. Food, Drug, and Cosmetic Act, as
amended (“FDC Act”), the Federal Drug Quality and Security Act, including Drug Supply Chain Security Act
(“DSCSA”), and Section 361 of the Public Health Services Act. Among other things, such laws, and the regulations
promulgated thereunder:
•
regulate the storage and distribution, labeling, packaging, handling, reporting, record keeping,
introduction, manufacturing and marketing of drugs, HCT/P products and medical devices, including
requirements with respect to unique medical device identifiers;
•
subject us to inspection by the U.S. Food and Drug Administration (“FDA”) and the U.S. Drug
Enforcement Administration (“DEA”), and similar state authorities;
•
regulate the storage, transportation and disposal of certain of our products that are considered
hazardous materials;
•
require us to advertise and promote our drugs and devices in accordance with applicable FDA
requirements;
•
require registration with the FDA and the DEA and various state agencies;
•
require record keeping and documentation of transactions involving drug products;
•
require us to design and operate a system to identify and report suspicious orders of controlled
substances to the DEA;
•
require us to manage returns of products that have been recalled and subject us to inspection of our
recall procedures and activities;
•
impose on us reporting requirements if a pharmaceutical, HCT/P product or medical device causes
serious illness, injury or death;
•
require manufacturers, wholesalers, repackagers and dispensers of prescription drugs to identify and
trace certain prescription drugs as they are distributed;
•
require the licensing of prescription drug wholesalers and third-party logistics providers; and
•
mandate compliance with standards for the recordkeeping, storage and handling of prescription drugs,
and associated reporting requirements.
The FDA has become increasingly active in addressing the regulation of computer software and digital health
products intended for use in health care settings. The 21st Century Cures Act (the “Cures Act”), signed into law on
December 13, 2016, among other things, amended the medical device definition to exclude certain software from
FDA regulation, including certain clinical decision support software. Certain of our businesses involve the
development and sale of software and related products to support physician and dental practice management, and it
is possible that the FDA or foreign government authorities could determine that one or more of our products is
subject to regulation as a medical device, which could subject us or one or more of our businesses to substantial
additional requirements, costs, and potential enforcement actions or liabilities for noncompliance with respect to
these products.
Applicable federal, state, local and foreign laws and regulations also may require us to meet various standards
relating to, among other things, licensure or registration, program eligibility, procurement, third-party
reimbursement, sales and marketing practices, product integrity and supply tracking to product manufacturers,
product labeling, personnel, privacy and security of health or other personal information, installation, maintenance
and repair of equipment and the importation and exportation of products. The FDA and DEA, as well as CMS
(including with respect to complex Medicare reimbursement requirements applicable to our specialty home medical
supplies business), have recently increased their regulatory and enforcement activities and, in particular, the DEA
has heightened enforcement activities due to the opioid crisis in the United States. Our business is also subject to
requirements of similar and other foreign governmental laws and regulations affecting our operations abroad.
The failure to comply with any of these laws and regulations, or new interpretations of existing laws and
regulations, or the imposition of any additional laws and regulations, could materially adversely affect our business.
The costs to us associated with complying with the various applicable statutes and regulations, as they now exist
and as they may be modified, could be material. Allegations by a governmental body that we have not complied
with these laws could have a material adverse effect on our businesses. While we believe that we are substantially
32
compliant with applicable laws and regulations, and believe we have adequate compliance programs and controls in
place to ensure substantial compliance, if it is determined that we have not complied with these laws, we are
potentially subject to penalties, including warning letters, substantial civil and criminal penalties, mandatory recall
of product, seizure of product and injunction, consent decrees and suspension or limitation of product sale and
distribution. If we enter into settlement agreements to resolve allegations of non-compliance, we could be required
to make settlement payments or be subject to civil and criminal penalties, including fines and the loss of licenses.
Non-compliance with government requirements could also adversely affect our ability to participate in important
federal and state government health care programs, such as Medicare and Medicaid, and damage our reputation.
The EU Medical Device Regulation may adversely affect our business.
The EU Medical Device Regulation No. 2017/745 (“EU MDR”) was meant to become applicable three years after
publication (in May 2020). However, on April 23, 2020, to allow EEA national authorities, notified bodies,
manufacturers and other actors to focus fully on urgent priorities related to the COVID-19 pandemic, the European
Council and Parliament adopted Regulation 2020/561, postponing the date of application of the EU MDR by one
year (to May 2021). The EU MDR significantly modifies and intensifies the regulatory compliance requirements
for the medical device industry as a whole. Once applicable, the EU MDR will among other things:
•
Strengthen the rules on placing devices on the market and reinforce surveillance once they are
available;
•
Establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality,
performance and safety of devices placed on the market;
•
Improve the traceability of medical devices throughout the supply chain to the end-user or patient
through a unique identification number;
•
Set up a central database to provide patients, healthcare professionals and the public with
comprehensive information on products available in the EU;
•
Strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to
undergo an additional check by experts before they are placed on the market; and
•
Identify importers and distributors and medical device products through registration in a database
(EudaMed not due until 2022 and after).
In particular, the EU MDR imposes stricter requirements for the confirmation that a product meets the regulatory
requirements, including regarding a product’s clinical evaluation and a company’s quality systems, and for the
distribution, marketing and sale of medical devices, including post-market surveillance. Medical devices that have
been assessed and/or certified under the EU Medical Device Directive may continue to be placed on the market
until 2024 (or until the expiry of their certificates, if applicable and earlier); however, requirements regarding the
distribution, marketing and sale including quality systems and post-market surveillance have to be observed by
manufacturers, importers and distributors as of the application date.
The modifications created by the EU MDR may have an impact on the way we design and manufacture products
and the way we conduct our business in the European Economic Area.
If we fail to comply with laws and regulations relating to health care fraud or other laws and regulations, we
could suffer penalties or be required to make significant changes to our operations, which could materially
adversely affect our business.
Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral
and reimbursement laws and regulations with respect to their operations. Some of these laws, referred to as “false
claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to
federal, state and other health care payers and programs. Other laws, referred to as “anti-kickback laws,” prohibit
soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering,
purchasing, leasing or arranging for, or recommending ordering, purchasing or leasing of, items or services that are
paid for by federal, state and other health care payers and programs. Certain additional state and federal laws, such
as the federal Physician Self-Referral Law, commonly known as the “Stark Law,” prohibit physicians and other
health professionals from referring a patient to an entity with which the physician (or family member) has a
33
financial relationship, for the furnishing of certain designated health services (for example, durable medical
equipment and medical supplies), unless an exception applies.
The fraud and abuse laws and regulations have been subject to heightened enforcement activity over the past few
years, and significant enforcement activity has been the result of “relators” who serve as whistleblowers by filing
complaints in the name of the United States (and if applicable, particular states) under applicable false claims laws,
and who may receive up to 30% of total government recoveries. Penalties under fraud and abuse laws may be
severe, and could result in significant civil and criminal penalties and costs, including the loss of licenses and the
ability to participate in federal and state health care programs, and could have a material adverse effect on our
business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in
a manner that could require us to make changes in our operations or incur substantial defense and settlement
expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational
harm and the incurring of substantial costs. Most states have adopted similar state false claims laws, and these state
laws have their own penalties which may be in addition to federal False Claims Act penalties, as well as other fraud
and abuse laws.
With respect to measures of this type, the United States government (among others) has expressed concerns about
financial relationships between suppliers on the one hand and physicians, dentists and other health care providers,
on the other. As a result, we regularly review and revise our marketing practices as necessary to facilitate
compliance.
In the EU, the Directive No. 2019/1937 of 23 October 2019
on the protection of persons who report breaches of
Union law
December 17, 2021. This Directive covers whistleblowers reporting breaches of certain EU laws, in particular as
regards public health, the above-mentioned Directive No. 2001/83, Regulation No. 726/2004 or, as regards data
protection, the GDPR. The Directive protects a wide range of people and includes former employees. All private
companies with 50 or more employees are required to create effective internal reporting channels.
We also are subject to certain United States and foreign laws and regulations concerning the conduct of our foreign
operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, German anti-corruption laws
and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records, which have been
the focus of increasing enforcement activity globally in recent years. Our businesses are generally subject to
numerous other laws and regulations that could impact our financial results, including, without limitation,
securities, antitrust, consumer protection, and marketing laws and regulations.
In the EU, both active and passive bribery are criminalized. The EU Council Framework Decision 2003/568/JHA
of 22 July 2003
establishes more detailed rules on the liability of
legal persons and deterrent sanctions. However, the liability of legal persons is regulated at a national level.
Failure to comply with fraud and abuse laws and regulations, and other laws and regulations, could result in
significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in
federal and state health care programs, and could have a material adverse effect on our business. We may
determine to enter into settlements, make payments, agree to consent decrees or enter into other arrangements to
resolve such matters. Intentional or unintentional failure to comply with consent decrees could materially adversely
affect our business.
While we believe that we are substantially compliant with applicable fraud and abuse and other laws and
regulations, and believe we have adequate compliance programs and controls in place to ensure substantial
compliance, we cannot predict whether changes in applicable law, or interpretation of laws, or changes in our
services or marketing practices in response to changes in applicable law or interpretation of laws, could have a
material adverse effect on our business.
34
If we fail to comply with laws and regulations relating to the confidentiality of sensitive personal information or
standards in electronic health records or transmissions, we could be required to make significant changes to our
products, or incur substantial fines, penalties or other liabilities.
Our businesses that involve physician and dental practice management products, and our specialty home medical
supply business, include electronic information technology systems that store and process personal health, clinical,
financial and other sensitive information of individuals. These information technology systems may be vulnerable
to breakdown, wrongful intrusions, data breaches and malicious attack, which could require us to expend
significant resources to eliminate these problems and address related security concerns, and could involve claims
against us by private parties and/or governmental agencies.
We are directly or indirectly subject to numerous and evolving federal, state, local and foreign laws and regulations
that protect the privacy and security of personal information, such as the HIPAA, the Controlling the Assault of
Non-Solicited Pornography and Marketing Act, the Telephone Protection and Electronic Protection Act of 1991,
Section 5 of the Federal Trade Commission Act, the CCPA, and the CPRA that becomes effective on January 1,
2023. Laws and regulations relating to privacy and data protection are continually evolving and subject to
potentially differing interpretations. These requirements may not be harmonized, may be interpreted and applied in
a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. Our
businesses’ failure to comply with these laws and regulations could expose us to breach of contract claims,
substantial fines, penalties and other liabilities and expenses, costs for remediation and harm to our reputation.
Also, evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or
disseminate patient information, or could require us to incur significant additional costs to re-design our products to
reflect these legal requirements, which could have a material adverse effect on our operations.
In addition, the European Parliament and the Council of the European Union have adopted the GDPR, which
increases privacy rights for individuals in Europe, or “Data Subjects”, including individuals who are our customers,
suppliers and employees. The GDPR extended the scope of responsibilities for data controllers and data processors
and generally imposes increased requirements and potential penalties on companies, such as us, that offer goods or
services to Data Subjects or monitor their behavior (including by companies based outside of Europe).
Noncompliance can result in penalties of up to the greater of EUR 20 million, or 4% of global company revenues.
Data Subjects also have the right to seek compensation for damages. EU member states may individually impose
additional requirements and penalties regarding certain matters, such as employee personal data.
In the United States, the CCPA, which increases the privacy protections afforded California residents, became
effective January 1, 2020. The CCPA generally requires companies, such as us, to institute additional protections
regarding the collection, use and disclosure of certain personal information of California residents. Compliance
with the new obligations imposed by the CCPA depends in part on how particular regulators interpret and apply
them, and because the CCPA is relatively new, and its implementing regulations were released in August of 2020,
there remains some uncertainty about how the CCPA will be interpreted by the courts and enforced by the
regulators. If we fail to comply with the CCPA or if regulators assert that we have failed to comply with the CCPA,
we may be subject to certain fines or other penalties and litigation, any of which may negatively impact our
reputation, require us to expend significant resources, and harm our business. Furthermore, California voters
approved the CPRA on November 3, 2020, which will amend and expand the CCPA, including by providing
consumers with additional rights with respect to their personal information, and creating a new state agency to
enforce CCPA and CPRA. The CPRA will come into effect on January 1, 2023, applying to information collected
by businesses on or after January 1, 2022.
Other states, as well as the federal government, have increasingly considered the adoption of similarly expansive
personal privacy laws, backed by significant civil penalties for non-compliance. While we believe we have
substantially compliant programs and controls in place to comply with the GDPR, CCPA and CPRA requirements,
our compliance with these measures is likely to impose additional costs on us, and we cannot predict whether the
interpretations of the requirements, or changes in our practices in response to new requirements or interpretations of
the requirements, could have a material adverse effect on our business.
We also sell products and services that health care providers, such as physicians and dentists, use to store and
manage patient medical or dental records. These customers and we are subject to laws, regulations and industry
35
standards, such as HIPAA and the Payment Card Industry Data Security Standards, which require the protection of
the privacy and security of those records. Our products or services may be used as part of these customers’
comprehensive data security programs, including in connection with their efforts to comply with applicable data
privacy and security laws and contractual requirements. Perceived or actual security vulnerabilities in our products
or services, or the perceived or actual failure by us or our customers who use our products or services to comply
with applicable legal or contractual data privacy and security requirements, may not only cause us significant
reputational harm, but may also lead to claims against us by our customers and/or governmental agencies and
involve substantial fines, penalties and other liabilities and expenses and costs for remediation.
Under the EU GDPR, health data belong to the category of “sensitive data” and benefit from specific protections.
Processing of such data is generally prohibited, except for specific exceptions.
Certain of our businesses involve the manufacture and sale of electronic health record (“EHR”) systems and other
products linked to government supported incentive programs, where the EHR systems must be certified as having
certain capabilities designated in evolving standards, such as those adopted by CMS and by the Office of the
National Coordinator for Health Information Technology of HHS (“ONC”). In order to maintain certification of
our EHR products, we must satisfy the changing governmental standards. If any of our EHR systems do not meet
these standards, yet have been relied upon by health care providers to receive federal incentive payments, we may
be exposed to risk, such as under federal health care fraud and abuse laws, including the False Claims Act. While
we believe we are substantially in compliance with such certifications and with applicable fraud and abuse laws and
regulations and that we have adequate compliance programs and controls in place to ensure substantial compliance,
we cannot predict whether changes in applicable law, or interpretation of laws, or resulting changes in our, could
have a material adverse effect on our business.
Moreover, in order to satisfy our customers, our products may need to incorporate increasingly complex reporting
functionality. Although we believe we are positioned to accomplish this, the effort may involve increased costs,
and our failure to implement product modifications, or otherwise satisfy applicable standards, could have a material
adverse effect on our business.
Additionally, as electronic medical devices are increasingly connected to each other and to other technology, the
ability of these connected systems to safely and effectively exchange and use exchanged information becomes
increasingly important. As a medical device manufacturer, we must manage risks including those associated with
an electronic interface that is incorporated into a medical device.
Tax legislation could materially adversely affect our financial results and tax liabilities.
We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as
foreign jurisdictions. From time to time, various legislative initiatives may be proposed that could materially
adversely affect our tax positions. There can be no assurance that our effective tax rate will not be materially
adversely affected by legislation resulting from these initiatives. In addition, tax laws and regulations are extremely
complex and subject to varying interpretations. Although we believe that our historical tax positions are sound and
consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions
will not be challenged by relevant tax authorities or that we would be successful in any such challenge.
We face inherent risk of exposure to product liability, intellectual property infringement and other claims in the
event that the use of the products we sell results in injury.
Our business involves a risk of product liability, intellectual property infringement and other claims in the ordinary
course of business, and from time to time we are named as a defendant in cases as a result of our distribution of
products. Additionally, we own interests in companies that manufacture certain dental products. As a result, we
could be subject to the potential risk of product liability, intellectual property infringement or other claims relating
to the manufacture and distribution of products by those entities. In addition, as our private-label business continues
to grow, purchasers of such products may increasingly seek recourse directly from us, rather than the ultimate
product manufacturer, for product-related claims. Another potential risk we face in the distribution of our products
is liability resulting from counterfeit or tainted products infiltrating the supply chain. In addition, some of the
products that we transport and sell are considered hazardous materials. The improper handling of such materials or
36
accidents involving the transportation of such materials could subject us to liability or at least legal action that
could harm our reputation.
GENERAL RISKS
Security risks generally associated with our information systems and our technology products and services could
materially adversely affect our business, and our results of operations could be materially adversely affected if
such products, services or systems (or third-party systems we rely on) are interrupted, damaged by unforeseen
events, are subject to cyberattacks or fail for any extended period of time.
We rely on information systems (IS) in our business to obtain, rapidly process, analyze, manage and store customer,
product, supplier and employee data to, among other things:
•
maintain and manage worldwide systems to facilitate the purchase and distribution of thousands of
inventory items from numerous distribution centers;
•
receive, process and ship orders on a timely basis;
•
manage the accurate billing and collections for thousands of customers;
•
process payments to suppliers; and
•
provide products and services that maintain certain of our customers’ electronic medical or dental
records (including protected health information of their patients).
Information security risks have generally increased in recent years, and a cyberattack that bypasses our IS security
systems (including third-party systems we rely on) causing an IS security breach may lead to a material disruption
of our IS business systems (including third-party systems we rely on) and/or the loss of business information, as
well as claims against us by affected parties and/or governmental agencies, and involve fines and penalties, costs
for remediation, and substantial defense and settlement expenses. In addition, we develop products and provide
services to our customers that are technology-based, and a cyberattack that bypasses the IS security systems of our
products or services causing a security breach and/or perceived security vulnerabilities in our products or services
could also cause significant loss of business and reputational harm, and actual or perceived vulnerabilities may lead
to claims against us by our customers and/or governmental agencies. In particular, certain of our practice
management products and services purchased by health care providers, such as physicians and dentists, are used to
store and manage patient medical or dental records. These customers are subject to laws and regulations which
require that they protect the privacy and security of those records, and our products may be used as part of these
customers’ comprehensive data security programs, including in connection with their efforts to comply with
applicable privacy and security laws. Perceived or actual security vulnerabilities in our products or services, or the
perceived or actual failure by us or our customers who use our products to comply with applicable legal
requirements, may not only cause reputational harm and loss of business, but may also lead to claims against us by
our customers and/or governmental agencies and involve damages, fines and penalties, costs for remediation, and
substantial defense and settlement expenses. In addition, a cyberattack on a third-party that we use to manage a
portion of our information systems could result in the same effects. Additionally, legislative or regulatory action
related to cybersecurity may increase our costs to develop or implement new technology products and services.
Furthermore, procedures and safeguards must continually evolve to meet new IS challenges, and enhancing
protections, and conducting investigations and remediation, may impose additional costs on us.
Finally, our business may be interrupted by shortfalls of IS systems providers engaged by our customers, such as
Internet-based services upon which our customers depend to access certain of our products.
Our global operations are subject to inherent risks that could materially adversely affect our business.
Our global operations are subject to risks that may materially adversely affect our business. The risks that our
global operations are subject to include, among other things:
•
difficulties and costs relating to staffing and managing foreign operations;
•
difficulties and delays inherent in sourcing products, establishing channels of distribution and contract
manufacturing in foreign markets;
37
•
fluctuations in the value of foreign currencies (including, without limitation, in connection with
Brexit);
•
uncertainties relating to the EU-UK Trade and Cooperation Agreement of December 2020, including
for example potential implementation problems such as border delays, as well as potential changes to
the U.K. regulatory scheme to replace EU requirements;
•
longer payment cycles of foreign customers and difficulty of collecting receivables in foreign
jurisdictions;
•
repatriation of cash from our foreign operations to the United States;
•
regulatory requirements, including without limitation, anti-bribery, anti-corruption and laws pertaining
to the accuracy of our internal books and records;
•
unexpected difficulties in importing or exporting our products and import/export tariffs, quotas,
sanctions or penalties;
•
limitations on our ability under local laws to protect our intellectual property;
•
unexpected regulatory, legal, economic and political changes in foreign markets;
•
changes in tax regulations that influence purchases of capital equipment;
•
civil disturbances, geopolitical turmoil, including terrorism, war or political or military coups; and
•
public health emergencies, including COVID-19.
Our future success is substantially dependent upon our senior management, and our revenues and profitability
depend on our relationships with capable sales personnel as well as customers, suppliers and manufacturers of
the products that we distribute.
Our future success is substantially dependent upon the efforts and abilities of members of our existing senior
management, particularly Stanley M. Bergman, Chairman and Chief Executive Officer. The loss of the services of
Mr. Bergman could have a material adverse effect on our business. We have an employment agreement with Mr.
Bergman. We do not currently have “key man” life insurance policies on any of our employees. Competition for
senior management is intense and we may not be successful in attracting and retaining key personnel. Additionally,
our future revenues and profitability depend on our ability to maintain satisfactory relationships with qualified sales
personnel as well as customers, suppliers and manufacturers. If we fail to maintain our existing relationships with
such persons or fail to acquire relationships with such key persons in the future, our business may be materially
adversely affected.
Disruptions in the financial markets may materially adversely affect the availability and cost of credit to us.
Our ability to make scheduled payments or refinance our obligations with respect to indebtedness will depend on
our operating and financial performance, which in turn is subject to prevailing economic conditions and financial,
business and other factors beyond our control. Disruptions in the financial markets may materially adversely affect
the availability and cost of credit to us.
Item 1B. Unresolved Staff Comments
We have no unresolved comments from the staff of the SEC that were issued 180 days or more preceding the end of
our 2020 fiscal year.
38
ITEM 2. Properties
We own or lease the following properties with more than 100,000 square feet:
Own or
Approximate
Lease Expiration
Property
Location
Lease
Square Footage
Date
Corporate Headquarters
Melville, NY
Lease
185,000
July 2036
Corporate Headquarters
Melville, NY
Own
105,000
N/A
Office and Distribution Center
Fiumana-Predappio, Italy
Own
183,000
N/A
Office and Distribution Center
Tours, France
Own
166,000
N/A
Office and Distribution Center
Gillingham, United Kingdom
Lease/Own
165,000
June 2033
Office and Distribution Center
Eastern Creek, New South Wales, Australia
Lease
161,000
July 2030
Office and Distribution Center
Niagara on the Lake, Canada
Lease
128,000
September 2021
Office and Distribution Center
Bastian, VA
Own
108,000
N/A
Office and Distribution Center
West Allis, WI
Lease
106,000
October 2027
Office and Distribution Center
Greer, SC
Lease
102,000
December 2028
Distribution Center
Denver, PA
Lease
624,000
December 2032
Distribution Center
Indianapolis, IN
Lease
380,000
March 2022
Distribution Center
Sparks, NV
Lease
370,000
December 2021
Distribution Center
Indianapolis, IN
Own
287,000
N/A
Distribution Center
Grapevine, TX
Lease
242,000
July 2023
Distribution Center
Gallin, Germany
Own
215,000
N/A
Distribution Center
Jacksonville, FL
Lease
212,000
February 2026
Distribution Center
Heppenheim, Germany
Lease
194,000
March 2030
The properties listed in the table above are our principal properties primarily used by our health care distribution
segment. In addition, we lease numerous other distribution, office, showroom, manufacturing and sales space in
locations including the United States, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the Czech
Republic, France, Germany, Hong Kong SAR, Ireland, Israel, Italy, Japan, Liechtenstein, Luxembourg, Malaysia,
the Netherlands, New Zealand, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand,
United Arab Emirates and the United Kingdom.
We believe that our properties are in good condition, are well maintained and are suitable and adequate to carry on
our business. We have additional operating capacity at certain distribution center facilities.
ITEM 3. Legal Proceedings
For a discussion of Legal Proceedings, see
Consolidated Financial Statements included under Item 8.
ITEM 4. Mine Safety Disclosures
Not applicable.
39
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded on the Nasdaq Global Select Market tier of the Nasdaq Stock Market, or Nasdaq,
under the symbol HSIC.
On February 8, 2021, there were approximately 235 holders of record of our common stock and the last reported
sales price was $70.78.
Purchases of Equity Securities by the Issuer
Our share repurchase program, announced on March 3, 2003, originally allowed us to repurchase up to two million
shares pre-stock splits (eight million shares post-stock splits) of our common stock, which represented
approximately 2.3% of the shares outstanding at the commencement of the program. Subsequent additional
increases totaling $3.7 billion, authorized by our Board of Directors, to the repurchase program provide for a total
of $3.8 billion of shares of our common stock to be repurchased under this program.
As of December 26, 2020, we had repurchased approximately $3.6 billion of common stock (75,563,289 shares)
under these initiatives, with $201.2 million available for future common stock share repurchases.
As a result of the COVID-19 pandemic, as previously announced, we have temporarily suspended our share
repurchase program in an effort to preserve cash and exercise caution in this uncertain period and due to certain
restrictions related to financial covenants in our credit facilities.
During the fiscal quarter ended December 26, 2020, we did not make any repurchases of our common stock. The
maximum number of shares that could be purchased under this program is determined at the end of each month
based on the closing price of our common stock at that time. The maximum number of shares that could be
repurchased as of October 31, 2020, November 28, 2020, and December 26, 2020 were 3,164,694, 3,159,724 and
3,056,528, respectively.
Dividend Policy
We have not declared any cash or stock dividends on our common stock during fiscal years 2020 or 2019. We
currently do not anticipate declaring any cash or stock dividends on our common stock in the foreseeable future.
We intend to retain earnings to finance the expansion of our business and for general corporate purposes, including
our share repurchase program. Any declaration of dividends will be at the discretion of our Board of Directors and
will depend upon the earnings, financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to payment of dividends and other factors.
Stock Performance Graph
The graph below compares the cumulative total stockholder return on $100 invested, assuming the reinvestment of
all dividends, on December 26, 2015, the last trading day before the beginning of our 2016 fiscal year, through the
end of our 2020 fiscal year with the cumulative total return on $100 invested for the same period in the Dow Jones
U.S. Health Care Index and the Nasdaq Stock Market Composite Index.
40
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
ASSUMES $100 INVESTED ON DECEMBER 26, 2015
ASSUMES DIVIDENDS REINVESTED
December 26,
December 31,
December 30,
December 29,
December 28,
December 26,
2015
2016
2017
2018
2019
2020
Henry Schein, Inc.
$
100.00
$
96.58
$
88.97
$
99.20
$
109.44
$
108.21
Dow Jones U.S. Health
100.00
97.04
119.21
124.84
154.14
175.81
NASDAQ Stock Market
100.00
108.00
140.01
134.97
186.63
267.70
41
ITEM 6. Selected Financial Data
The following selected financial data, with respect to our financial position and results of operations for each of the
five fiscal years in the period ended December 26, 2020, set forth below, has been derived from, should be read in
conjunction with and is qualified in its entirety by reference to, our consolidated financial statements and notes
thereto. The selected financial data presented below should also be read in conjunction with
,
“
” and
,
“
.”
Years ended
December 26,
December 28,
December 29,
December 30,
December 31,
2020
2019
2018
2017
2016
(in thousands, except per share data)
Income Statement Data:
Net sales
$
10,119,141
$
9,985,803
$
9,417,603
$
8,883,438
$
8,218,885
Gross profit
2,814,343
3,090,886
2,910,747
2,746,662
2,605,907
Selling, general and administrative expenses
2,246,947
2,357,920
2,217,273
2,071,576
1,975,445
Litigation settlements
-
-
38,488
5,325
-
Restructuring costs (1)
32,093
14,705
54,367
-
38,621
Operating income
535,303
718,261
600,619
669,761
591,841
Other expense, net
(35,408)
(37,954)
(63,783)
(39,967)
(18,705)
Income from continuing operations before taxes, equity
499,895
680,307
536,836
629,794
573,136
Income taxes (2)
(95,374)
(159,515)
(107,432)
(308,975)
(169,311)
Equity in earnings of affiliates
12,344
17,900
21,037
15,293
17,110
Net gain (loss) on sale of equity investments (3)
1,572
186,769
-
(17,636)
-
Net income from continuing operations
418,437
725,461
450,441
318,476
420,935
Income (loss) from discontinued operations
986
(6,323)
111,685
140,817
135,460
Net income
419,423
719,138
562,126
459,293
556,395
Less: Net income attributable to noncontrolling interests
(15,629)
(24,770)
(19,724)
(25,304)
(19,651)
Less: Net (income) loss attributable to noncontrolling
-
366
(6,521)
(27,690)
(29,966)
Net income attributable to Henry Schein, Inc.
$
403,794
$
694,734
$
535,881
$
406,299
$
506,778
Amounts attributable to Henry Schein, Inc.:
Continuing operations
402,808
700,691
430,717
293,172
401,284
Discontinued operations
986
(5,957)
105,164
113,127
105,494
Net income attributable to Henry Schein, Inc.
$
403,794
$
694,734
$
535,881
$
406,299
$
506,778
Earnings (loss) per share attributable to
From continuing operations:
$
2.83
$
4.74
$
2.82
$
1.87
$
2.48
2.81
4.69
2.80
1.85
2.45
From discontinued operations:
$
0.01
$
(0.04)
$
0.69
$
0.72
$
0.65
0.01
(0.04)
0.68
0.72
0.64
Earnings per share attributable to Henry Schein, Inc.:
$
2.83
$
4.70
$
3.51
$
2.59
$
3.14
2.82
4.65
3.49
2.57
3.10
Weighted-average common shares outstanding:
142,504
147,817
152,656
156,787
161,641
143,404
149,257
153,707
158,208
163,723
42
Years ended
December 26,
December 28,
December 29,
December 30,
December 31,
2020
2019
2018
2017
2016
(in thousands)
Net Sales by Market Data:
Health care distribution (4):
$
5,912,593
$
6,415,865
$
6,347,998
$
6,047,811
$
5,554,296
3,617,017
2,973,586
2,661,166
2,497,994
2,337,661
9,529,610
9,389,451
9,009,164
8,545,805
7,891,957
Technology and value-added services (5)
514,258
515,085
408,439
337,633
326,928
Total excluding Corporate TSA revenues
10,043,868
9,904,536
9,417,603
8,883,438
8,218,885
Corporate TSA revenues (6)
75,273
81,267
-
-
-
$
10,119,141
$
9,985,803
$
9,417,603
$
8,883,438
$
8,218,885
As of
December 26,
December 28,
December 29,
December 30,
December 31,
2020
2019
2018
2017
2016
(in thousands)
Balance Sheet Data:
Total assets
$
7,772,532
$