Consolidation destined to pick up

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Sunday, November 30, 2003

Eventually, three to four providers will control 50% of the HME market and here’s why.

#1. We are already on track. In 1998 the collective revenues of the three largest publicly owned providers (Apria, Lincare, Liberty Medical) was $1.5 billion. For 2003 their revenues will be an estimated $2.8 billion. Their annual rate of growth is 13.5%. Their current share of our $18 billion market is 16% (collectively). Each of the three has the financial capacity to sustain their rate of growth and more. If they do, in 2008 they will have a 25% share of a $21 billion market and in another five years they would control 41% of a $24 billion market just by maintaining status quo.

I am not suggesting that these companies will be at the top of the heap in 10 years, but if someone acquires them or some of them merge there is no reason to assume they will lose their momentum. Additionally, there are several providers that these three could acquire to add more than $100 million in revenues per acquisition. One of these three or some consolidation of these three could also provide the fourth piece of the puzzle to account for 50%.

# 2. Natural evolution of industry. Not just this industry but all. Renowned strategist and Harvard professor Dr. Michael Porter documented the characteristics of the stages of industry lifecycles and ours fits right in with all of the others. Consolidation is one of the characteristics. Today I checked out the market share of the top four companies in three mature industries; commercial banking, computer manufacturing and retail drugs. Here’s the stats: commercial banking’s top four control 46% (national banking laws didn’t let them start consolidating until 1988); computer manufacturers top four have 87%; and retail drugs 61%. We don’t have to be senior citizens to remember the consolidation of each of these industries.

#3. Cost containment from payors will remain because of our aging population. Reducing overhead by consolidation will become an increasingly strong motivator for mergers and acquisitions.

#4. New entrants will accelerate consolidation. The rate of new entrants is faster than growth of demand. By 2008 there will be a net increase of 953 providers. The effect will be to reduce average revenue per provider thereby increasing the difficulty of being in business. Some will fail, some will sell. All in all, the new entrants will ultimately lead to an acceleration in the rate of mergers between 2008 and 2013.

- Wallace Weeks is president of The Weeks Group at 321-752-4514.

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