How Consolidation, Choice & Competition are Changing the Future - - PowerPoint PPT Presentation

How Consolidation, Choice & Competition are Changing the Future of the North American Animal Health Industry

Presented by Chris Ragland, Managing Principal Axxiom Consulting, LLC June 8, 2016

Chris Ragland, Managing Principal Axxiom Consulting & CEO Animalytix LLC

• Founder & CEO Animalytix LLC (2010 – Present)
• Founder & Managing Principal, Axxiom Consulting (2008-Present)
• President, Intervet Inc. (2005 – 2008)
• Vice President, Commercial Ops, Intervet Inc., (2000 – 2005)
• Vice President, Market Dev. Group, Intervet, Inc. (1999 – 2000)
• Director, Portfolio Development Group, Feed Additives and

Productivity Enhancers, Hoechst Roussel Vet GmbH, Wiesbaden Germany (1996-1999)

• North Am. Poultry Bus. Unit Director (1993-1996)

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Consolidation …

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Abbott Agri-Bio Alpharma American Cyanamid* Beecham Labs Embrex Fort Dodge I.D. Russell Norden Labs Pfizer Animal Health* Pharmacia Smith Kline Salsbury Labs Solvay Synbiotics Syntex Upjohn American Scientific Labs Bayer NA Biologicals Biotrends International Coopers Harris Vaccines Hoechst Roussel Vet ICI IMC Intervet* Jen-Sal Mallinckrodt* Pitman-Moore* Schering-Plough* Sterwin Labs Syntro Vet Tri-Bio AgriLabs (cattle bios) Chem Gen Ciba Geigy Grand Labs Ivy Labs Janssen Animal Health Lohmann Animal Health Maine Biological Labs Monsanto (rBST) Novartis Vet Life Vineland Poultry Labs Wyeth Labs (Ireland)

Consolidation Among Leading AH Companies

*indicates past global #1 ranking

Animal Health Is Increasingly Concentrated With Top 11 Manufacturers Representing >85%

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$- $1,000 $2,000 $3,000 $4,000 $5,000 ZTS MRK ELA MER BAY BIV CEV VIR PHI VTQ DEC

Global Animal Health Sales by MFG - 2015

Post Merger, Top 4 Companies Will Cover > 50%

• f Global Traditional Animal Health Market

Confidential information; Property of Axxiom Consulting LLC

$- $1,000 $2,000 $3,000 $4,000 $5,000 ZTS BIV MRK ELA BAY CEV VIR PHI VTQ DEC

Global Animal Health Sales by MFG - 2015 - Post Merger

Revenue Post Merger

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? ? ? ?

$- $500,000,000 $1,000,000,000 $1,500,000,000 $2,000,000,000 $2,500,000,000 ZTS BIV ELA MRK BAY VIR CEV VTQ

NA Animal Health MFGs Pre & Post BIV/MER Merger

2015 2015 POST MERGER

For North America, the Situation is Similar with the Added Complexity of BIVI Divestitures

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What is the Result of Continued Consolidation?

• Improved economies of scale & operational efficiencies
• Reduction in choice of # of suppliers
• Increased opportunity for “full line” suppliers

(core pharma products & vaccines for all major species)

• Continued / increased competitive intensity; pricing incentives,

portfolio offers and ancillary services for differentiation

• Forced Divestitures (e.g. Small Animal / Rabies Vaccines; Elanco Sentinel)
• Distraction among the merging entities (competitor opportunity)
• Niche service and specialty developmental opportunities resulting

from:

• Complexity
• Overly broad portfolios
• Degradation of Service / Attention to Detail

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Choice & Competition

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Traditional US Retail Sales Remain “Sluggish” and Underperform Expectations

1. Q1 2016 results from leading retailers Kohls, Macys, J. C. Penney and Wal-Mart reflected sluggish growth of < 2% 2. “If there is any shortfall to our … expectations on sales, it was really about traffic,” Chief Executive Kevin Mansell said. “We’re looking to drive increases in traffic, and traffic was essentially flat in the first quarter” 3. Retail sales have been flat or down in four of the past five months while

• n-line retail is up 15%, accounts for 60% of segment growth and 10.5%
• f all non-restaurant, non-bar retail

4. Segment leader Amazon keeps advancing, growing at or above industry average; Wal-Mart reports on-line growth of 7% and trend is decelerating

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U.S. e-commerce grows 14.6% in 2015

February 17, 2016, 9:45 AM / By Stefany Zaroban Associate Director of Research, Internet Retailer

1. E-commerce sales for 2015 totaled $341.7 billion (+14.6% vs PY), representing 36.2% of total retail sales growth in 2015 (U.S. Commerce Department) 2. Factoring out items not normally bought online such as fuel and automobiles, e-commerce accounted for 10.5% of retail sales in 2015 versus 9.5% in 2014. 3. This is the sixth year in a row that U.S. e-commerce sales have grown near or above 15%.

4. Critical questions:

• Do you know whether these trends are impacting your business?
• If so, do you know in what way and at what rate?
• Are you implementing a strategy to mitigate or, better yet,

leverage those key trends?

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Pet Medications in the U.S., 3rd Edition Packaged Facts

• Veterinarians held 58% of the $ 7.6 billion pet medication market (2013),

with retail channels at 28%, and Internet/mail order at 13%

• According to Packaged Facts’ May-June 2013 Pet Owner Survey,

veterinarians are the outlet of choice for 76% of purchasers of heartworm medications (Rx) and for more than 40% of purchasers of flea/tick spot-

• ns, most of which are nonprescription
• Packaged Facts believes pet medications will be one of the highest

growth areas of pet retailing during the next decade, as more ethical and prescription products migrate to OTC

• In other words, the days of veterinarians having a virtual monopoly on

sales of pet medications are a thing of the past, with the days of pet medication distribution increasingly paralleling that of human medications … and with flea/tick spot-ons, whose sales are already weighted outside the veterinary channel, leading the way

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JAN 2015 Survey Results of 200 Eastern US Veterinary Practices (Community Veterinary Partners)

Question: What do you consider the primary threat to your current business model?

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15% 7% 8% 16% 33% 22% 0% 5% 10% 15% 20% 25% 30% 35% 40%

Existing Competitors New practices in my area Corporate practices Big Box Retailers Online Pharmacies Spay & Neuter Clinics and Non- Profit Organizations

JAN 2015 Survey Results of 200 Eastern US Veterinary Practices (Community Veterinary Partners)

The Five Forces that Shape Veterinary Industry Competition in 2016

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Threat of New Entrants Threat of Substitutes

Rivalry Among Existing Firms

Power of Customers Power of Suppliers

From “The Five Competitive Forces that Shape Strategy” by Michael E. Porter, Harvard Business Review, January 2008

Shifting consumer preferences driven by price and convenience are re-shaping pet medication sourcing and sales channels

• Dr. Google

Low-cost providers Retailers & On-Line Specialty and referral practices

Big-Box & On-Line Retail Growth Reflects Strong “Substitution” for Veterinary Sourcing

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Sources: Veterinary Practice News 10.26.2015 citing Packaged Facts; Axxiom Consulting & Animalytix LLC

$- $500,000,000 $1,000,000,000 $1,500,000,000 $2,000,000,000 $2,500,000,000 $3,000,000,000 $3,500,000,000 $4,000,000,000 $4,500,000,000 Veterinary Big Box Retail On-Line Specialty Retail

Estimated Sales of Pet Medications by Channel

Nearly $ 3.0 billion in pet medication expenditures (~ 40% of total

annual consumer purchases) now go through non-vet channels

As Big-Box Retailers, Amazon, PetSmart and Petco Emphasize E-tailing, Veterinarians Demur

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31% 31% 25% 13% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% It's the predominant way we communicate with our clients We believe it's important but we don't have the time to stay on top of it We have a website and that is sufficient to our needs Our practice doesn't have a significant online presence JAN 2015 Survey Results of 200 Eastern US Veterinary Practices (Community Veterinary Partners)

Failure to adapt to a new consumer reality will accelerate reductions in dispensing revenues, most notably for chronic use medications; effective use of social media, email and web presence is critical

Pet Owners Skew High for Internet-Related Practices But There’s a Catch …

• As reported by Packaged Facts … the Internet is a fast-growing channel in

terms of pet product sales, reflecting pet owners’ above average interest in most Internet - related areas

• 41% of pet product buyers agree they use the Internet to find information

about pet care services, and 39% agree they use the Internet to help choose which pet foods to buy

• Pet owners however are hesitant to embrace online and mobile

advertising

• Cat owners in particular skew low for wanting to hear about new

products via email (index of 79), nor do they wish to get advertisements

• n their mobile devices (index of 47)

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Analysis of DVM Prescriptions Delivered from Human Pharmacies Reflect Growth Trend

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10.8% 11.9%

10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0%

• 1,000,000

2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 10,000,000 New Prescriptions Total Prescriptions MAT Oct 2013 MAT Oct 2014 Change

• Nearly 60,000 veterinarians

prescribed at least 1 Rx script fulfilled at a human pharmacy location FEB 2015 – JAN 2016:

• 5.3M new prescriptions
• 9.4M total prescriptions
• $ 125m+ in total market value
• Top Rx Products

Alprazolam Gabapentin Amitriptyline Humulin N Amlodipine Levetiracetam Amoxicillin Meloxicam Benazepril Methimazole Cephalexin Phenobarbital Enalapril Prednisone Fluoxetine Tramadol Furosemide Zonisamide 2012-2014 Results Indicated 10%+ Growth in Rx Scripts via Pharmacies

The Push by Big-Box and Traditional Human Pharmacies Require Response by Veterinarians

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• The combination of nearly 10 million existing scripts with aggressive

expansion efforts by the pharmacies is a potent and growing threat to veterinarian dispensing volumes

• Flea control, heartworm, NSAIDs, anti-infectives and other chronic use

medications are at highest risk ($ 1.0+ billion in current vet revenues)

• Traditional veterinary pharmacy practices will no longer be sufficient;

improvements required include:

• Improved client education / counseling on proper drug usage and

handling

• Use of properly designed product (drug) information sheets including

adverse events / poisoning information

• Implementation of formal adverse events reporting and management

systems / policies

• Formal client acknowledgement / sign-off procedures

Congress and FTC are Seeking to Introduce a “6th” Force into the Equation for Vet Scripts

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Threat of New Entrants Threat of Substitutes

Rivalry Among Existing Firms

Power of Customers Power of Suppliers

From “The Five Competitive Forces that Shape Strategy” by Michael E. Porter, Harvard Business Review, January 2008

Big-Box retailers dissatisfied with current pet medications sales want to “stack the deck” against veterinarians with the help of Congress and the FTC

• Dr. Google

Low-cost providers Retailers & On-Line Government Regulation Specialty and referral practices

H.R.1406 – Fairness to Pet Owners Act of 2011

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Sponsor: Rep. Jim Matheson (D-UT-2) / introduced 4.6.2011 Committees: House – Energy and Commerce

Requires the Federal Trade Commission (FTC) to promulgate rules for veterinary scripts:

• 1. provide pet owner a veterinary script and written disclosure that pet owner may fill

script through the prescriber or another pharmacy determined by the pet owner

• 2. provide script if requested by pet owner
• 3. Prohibits setting conditions for providing script by:
• requiring the purchase of the drug from the prescriber or from another person;
• requiring payment in addition to, or as part of, the fee for an examination and

evaluation; or

• requiring the pet owner to sign a waiver or disclaim liability of the prescriber

for the accuracy of the veterinary prescription, or delivering to the pet owner a notice waiving or disclaiming such liability. Permits the prescriber to require payment of fees for an examination and evaluation before providing a veterinary prescription, but only if the prescriber requires immediate payment in the case of an examination that reveals no requirement for an animal drug.

H.R.4023 - Fairness to Pet Owners Act of 2014

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Sponsor: Rep. Jim Matheson (D-UT-4) / introduced 2.10.14 Committees: House – Energy and Commerce Directs the Federal Trade Commission (FTC) to require prescribers of animal drugs to: 1. verify prescriptions and provide copies of prescriptions to pet owners, pet

• wner designees, and pharmacies,

2. without the prescriber demanding payment or establishing other conditions 3. applies requirements to medication for domesticated household animals that consumers are not allowed to purchase without a prescription

What is Behind This Legislation? A $5 Script Fee and Big-Box’s Desire to Expand Pet Drug Sales

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• Congressman’s staffer supposedly paid $ 43 for monthly dog medication

which she later learned was available at a drugstore for $18

• Veterinarian charged staffer a prescription-writing fee of $5
• Congressman heard similar stories from others, prompting Congressman to

draft initial bill

• Supporters include Wal-Mart who “supports efforts that give our customers

a say where they purchase medicines and enables them to save money on the same items commonly prescribed to individuals, such as insulin and antibiotics, so even their pets can live better.”

• Congressman denied Wal-Mart asked to create the bill. “I know they’re

supportive …, but I don’t think they’ve been closely working with me. They weren’t involved in writing the legislation, …,” he said. “… They’ve come into my office and said, ‘Thank you.’ I think we wrote the bill ourselves.”

Source: Edie Lau for the VIN News Service, March 14, 2014

Pet Fairness Act Prompted FTC Action Focused

• n Consumer Access to Pet Medications

121 page report published in May 2015 Comingled issues of:

• script portability
• drug distribution practices, and
• access to generics

Acknowledged consumers in the last decade “have benefitted from lower prices, greater convenience, and improved service” BUT … … recommended further study of mandatory generic use and issuance of scripts as well as analysis of pricing by channel.

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What Are Key Factors Needed to Effectively Compete in this New and Evolving Market?

1. Understand the alignment of interests (vendors, competitors, new market entrants and regulators / legislators) 2. Leverage trade associations to drive favorable / block or mitigate negative legislation (CAHI, CVMA, OVMA, etc…) 3. Leverage technology to harvest, intelligently assess and act upon market and client information to drive improved diagnostic capabilities for the veterinarian and compliance for the patient 4. Adapt business models to recruit, engage and provide “an improved experience” to build customer satisfaction and loyalty 5. At the core of the animal health industry’s unique position is the veterinarian’s level of client intimacy; develop strategies to build and further expand on this aspect to assure long term growth and prosperity for the industry

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Questions & Answers

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How Consolidation, Choice & Competition are Changing the Future of the North American Animal Health Industry

Presented by Chris Ragland, Managing Principal Axxiom Consulting, LLC June 8, 2016