| 2018-02-13 11:25:01|
HSIC, PDCO 11:25 02/13 02/13/18
Patterson, Henry Schein sliding after FTC alleges anti-discount conspiracy
Shares of Patterson Companies (PDCO) and Henry Schein (HSIC) are sliding after the Federal Trade Commission said it is suing the dental products distributors for conspiring to refuse to provide discounts. Commenting on the lawsuit, William Blair analyst John Kreger argued that the complaint will likely exacerbate investor concerns about the sustainability of the companies' pricing and margins, an opinion shared by his peer at Leerink. DISCOUNT-EVADING CONSPIRACY: The FTC filed a complaint against the nation's three largest dental supply companies - namely Benco, Henry Schein and Patterson Companies - alleging that they violated U.S. antitrust laws by conspiring to refuse to provide discounts to or otherwise serve buying groups representing dental practitioners. These buying groups sought lower prices for dental supplies and equipment on behalf of solo and small-group dental practices, seeking to gain discounts by aggregating and leveraging the collective purchasing power and bargaining skills of the individual practices. The complaint also alleges an FTC Act Section 5 violation against Benco for inviting a fourth competing distributor to join the conspiracy. The alleged agreement among Benco, Henry Schein and Patterson deprived independent dentists of the benefits of participating in buying groups that purchase dental supplies from national, full-service distributors, the FTC said. PATTERSON, HENRY SCHEIN DENY ALLEGATIONS: Patterson Companies said it "believes that the allegations as described are meritless" and that it intends to defend itself vigorously. The company added that the complaint seeks injunctive relief and does not seek monetary damages. "The company does not anticipate that this matter will have a material adverse effect on our financial condition or results of operations," Patterson added. Meanwhile, Henry Schein has also denied the FTC's anti-trust allegations, saying: "Contrary to the FTC's allegations, the company was a leader in supplying buying groups, has consistently done business with buying groups, has a dedicated team to serve buying groups, and never entered into an agreement with others to refuse to do business with buying groups. [...] The company believes that the allegations as described in the press release are meritless and intends to defend itself vigorously." Henry Schein also said it does not anticipate that this matter will have a material adverse effect on its financial condition or results of operations. SUIT MAY WORSEN CONCERNS: In a research note to investors, William Blair's Kreger pointed out that this is not the first time such anti-competitive allegations have been leveled against Henry Schein, Patterson, and other leading dental distributors. However, the analyst noted that the FTC complaint may add credence to the anti-trust argument, increase the visibility of the risk, and exacerbate investor concerns about the sustainability of the companies' pricing and margins. Kreger also believes this could put further pressure on the valuations of Henry Schein and Patterson in the near-term, particularly until there is some clear evidence of a spending rebound in dental. Meanwhile, Leerink analyst David Larsen told investors that he views the news as being "very serious," and believes it could result in longer-term margin headwinds and multiple compression for Henry Schein. While a trial could take months to resolve and may ultimately end in a settlement or fine, Henry Schein and Patterson should trade down on the news, he contended. PRICE ACTION: In late morning trading, shares of Henry Schein and Patterson have dropped about 10% and 9% to $64.99 and $30.10, respectively.
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