Shield Healthcare breaks with Coloplast

Friday, May 31, 2002

VALENCIA, Calif. - After learning in April that Coloplast owns one of its East Coast competitors, Shield Healthcare (SHC) is severing its relationship with the manufacturer of medical supplies.

By letter, Shield recently informed customers that the revelation of Coloplast's 100% ownership stake in Moorestown, N.J.-based Sterling Medical Services had prompted the company to stop carrying Coloplast product. Shield declined to say how much business it was doing with Coloplast, but characterized it as significant.

"I will say that it was enough to make SHC take a stand on principle," said Todd Smith, SHC's marketing manager.

Manufacturers who sell product direct to end-users, either outright or through wholly owned subsidiaries, strike a nerve among HME providers. In a May 15, 2002 HME NewsPoll, 60% of 111 respondents said they would strongly object to manufacturers who would sell product direct to end-users, even if HMEs are dropping those same product lines.

Coloplast said the decision to purchase Sterling Medical Services was not made as a way to gain access to the end-user, but to gain access to managed care contracts.

"I've called on managed care companies as a manufacturer, and we are not entertained," said David Hotchkiss, Coloplast's vice president of marketing. "Here's a way for us to make an investment in the supply business that creates some access."

Coloplast acquired a 50% interest in Sterling Medical in 1998 and completed full ownership in the company late last year. Shield only found out about the Coloplast's relationship with Sterling when customers began to call from the Denver area after a local supplier there stopped carrying Coloplast.

Patti Langenbach, president of Medical Care Products in Jacksonville, Fla., found out about the Coloplast/Sterling connection from a rival manufacturer but didn't confirm the news until last month. She buys about $25,000 of product from Coloplast annually, but may now quit doing business with the company as a matter of principle.

But it's going to be a difficult choice, she said. In the past Langenbach has informed patients that she would no longer carry particular products, but with easily defensible reasons. The allowable dropped too low. There were changes to the fee schedule. An insurance company would no longer pay. She doesn't relish letting her customers know why she may no longer carry Coloplast.

"This is going to be a tough one to explain to customers," she said. "They'll ask why not, and what do I say - Well, you can buy direct from them now. I've never wanted to have that type of relationship with a manufacturer, where they would sell around me."

Smith said he expects to lose few customers to Shield's decision to stop selling Coloplast. "It's too early to tell," he said, "but we have done this before with great success in keeping our customers."

Hotchkiss said he doesn't think providers should have any qualms about buying from a vendor who may also own a competitor. He said the businesses don't share offices, and that Sterling is free to sell products from its competitors. To shut out a vendor because they are looking for other avenues of growth is short-sighted, he said.

"The people who come up short are people who want our products and are being denied an opportunity to go into a particular product they like," he said.

Coloplast's decision to purchase Sterling Medical is not the first manufacturer of medical supplies to buy a supplier. In 1982, Shield was purchased by C. R. Bard, one of the leading manufacturers of urology products. In 1990, Bard sold Shield to Kobayashi Enterprises International, a Japanese pharmaceutical manufacturer and distributor. HME