Survey shows positive signs for vet industry

If not recession-proof, then certainly recession-resistant. That’s how Chicago-based investment firm William Blair & Co. considers the veterinary healthcare industry. And that’s good news for Veterinary Advantage readers. So too are Blair’s predictions that veterinary diagnostics are strong and growing stronger.
Earlier this year, the company surveyed veterinary professionals and students at the North American Veterinary Conference in Orlando, Fla. It was the fifth year that the company has done such a survey, alternating between NAVC and the Western Veterinary Conference in Las Vegas. The survey focused primarily on trends in the veterinary diagnostics and distribution markets. In total, 1,012 people were surveyed, 78 percent of whom were doctors of veterinary medicine and veterinary technicians, and the remaining 22 percent practice administrators, students and others. The majority – 86 percent – were engaged primarily in the care of small, companion animals. Three percent were focused primarily on large animals, 1 percent on production animals, and 8 percent on “other.”

Key findings include:
• Long-term growth remains solid, though the current recession is having an impact on the industry.
• Diagnostic laboratory testing – both in-clinic and reference laboratory services – should continue to increase over the next three to five years.
• Veterinary professionals seem pleased with the performance of their current distributors, equipment manufacturers and lab services providers.
Larger practices
Thirty-six percent of the survey participants work in clinics with just one or two veterinarians, which is just about the same percentage as last year. However, 15 percent were from practices in hospitals with seven or more veterinarians. That’s up from 10 percent in the original 2005 survey. That statistic prompted the company to observe that the industry continues to consolidate into fewer but larger practices.
“Importantly, we believe this figure will continue to grow over the coming years, as large specialty and referral practices – which are the most likely to have seven or more veterinarians – grow at a faster rate than the broader animal hospital market,” observed the report’s authors. The good news for distributors and manufacturers of diagnostic testing products, as well as providers of reference lab services, is that larger and more specialized practices tend to order or perform more diagnostic testing than smaller practices.
Another trend noted in the report is the growing incidence of specialization among veterinarians. Citing American Veterinary Medical Association statistics, the report’s authors note that the number of veterinarians practicing in AVMA-recognized fields of specialization has risen dramatically over the last few decades, rising from approximately 3,000 specialists in the early 1990s to 9,305 at the end of 2008. That’s almost 11 percent of the total 85,977 veterinarians in the United States. “In addition, 29 percent of our student survey participants plan to specialize when they begin practicing, implying a continued increase in the number of specialists in the coming years,” according to the report’s authors. Again, that is good news for suppliers of diagnostic testing equipment and reference lab services, as hospitals with specialists tend to conduct more diagnostic tests than those without them. (See below.)

Spending slower, but still strong
Consumers continue to spend money on their pets, and the veterinarians surveyed expect that trend to continue. “The results confirmed our expectation that the veterinary healthcare market’s solid growth should continue in the coming years,” write the authors. “Moreover, our findings are consistent with forecasts by other industry experts of long-term annual revenue growth rates in the mid- to high single digits.”
Indeed, growth rates in the veterinary market historically have exceeded those of general consumer expenditures, even in recessionary periods, note the authors. During each of the years in which real GDP declined in the United States since 1972 (that is, 1974, 1975, 1980, 1981 and 1991), spending on veterinary services increased, they say. Moreover, the compound annual growth rate of veterinary spending over the 30-year period was more than double that of GDP growth.
“To be clear, our intention is not to imply that the veterinary healthcare industry is completely immune to economic cycles, but rather that it appears to be much more resistant to dramatic swings than other areas of the economy,” write the authors. They cite the fact that growth in the veterinary healthcare market decelerated by roughly 1 percent on average in years when the U.S. economy fell into a recession but still maintained positive growth (average more than 4.6 percent growth) during each of the last five recessionary periods.
Asked about their clients’ spending habits in 2008, 46 percent of all respondents indicated that pet owner spending had declined, while approximately 43 percent said that spending either remained steady or increased over previous periods. (In contrast, in the 2008 survey, 58 percent reported steady or increasing growth during 2007.)
When asked what the future holds, 32 percent of the survey participants said they expect spending by pet owners to increase during the upcoming year (2009). In contrast, in the 2008 survey, 47 percent of U.S.-based respondents predicted growth from prior-year levels. Sixteen percent predicted pet-owner spending would remain at 2008 levels, while 37 percent expected spending to decline. (Fourteen percent said they were unsure.) “Importantly, this data shows how the industry continues to grow, albeit at a slower pace, during the difficult economic environment,” according to the authors. “Nonetheless, this is causing us to be more cautious in the short term, despite our more bullish long-term view.”

Diagnostic testing
Thirty-six percent of respondents predicted that wellness/prevention medicine will be the most important growth driver, while 32 percent expect diagnostic services to be a significant contributor as well. “Because veterinary practices realize the importance of wellness/preventive care to a pet’s overall health and diagnosis in the future growth and profitability of their practices, we view this as a positive finding for the diagnostic testing market,” write the authors.
Almost all – 98 percent – of respondents currently conduct diagnostic tests for their clients’ pets, via both in-clinic equipment and outside reference laboratories, according to Blair. Eighty-seven percent indicated they use both types of testing. “[T]he market is highly penetrated,” observe the report’s authors. “Therefore, volume growth in the United States will be primarily dependent on whether this existing customer base can be expected to increase utilization levels of laboratory testing in the future. Given our survey results and other factors…we continue to strongly believe this will be the case.”
Apparently so do veterinarians. Just five of 489 veterinarians and five of 237 vet technicians expect the volume of diagnostic testing to decline in the coming years. Seventeen percent predicted “significantly more testing” and 62 percent predicted “more testing” in the next three to five years, while 20 percent predicted about the same as current levels.
When asked if they believed the industry would trend toward more in-clinic testing or more testing through outside (reference) labs, survey respondents were mixed. Thirty-six percent of respondents predicted more in-clinic testing (compared with 33 percent in 2008 and 42 percent in 2007), while 28 percent predicted more outsourced testing (compared with 40 percent last year and 30 percent in 2007). Thirty-six percent predicted no change in the mix.

How to explain veterinarians’ bullishness on diagnostic testing? William Blair offers four answers:
• First, veterinarians are becoming aware that performing additional diagnostic testing is not only good medicine, but also is a high-margin business. “As such, veterinarians are beginning to look to use more diagnostic testing to augment lost income from product sales attrition (i.e., the loss of food and pharmaceutical sales to chain stores and online distributors) and diminished vaccination revenues (as protocols have shifted from annual vaccinations to vaccinations every two to three years).”
• Second, the introduction of novel pet pharmaceuticals drives diagnostic testing volume, as doctors recommend routine monitoring to ensure the safety and efficacy of the drugs. And pet owners who pay for and administer drugs are likely to comply. “As such, we believe the increased movement of pharmaceutical manufacturers into the animal healthcare market will continue to foster incremental diagnostic testing growth over the coming years,” say
the authors.
• Third, diagnostic equipment manufacturers and service providers “are becoming more aggressive and savvy in their marketing to veterinarians and pet owners,” according to Blair.
• Fourth, the introduction of novel diagnostic tests and testing equipment also increases the industry’s growth profile, according to the authors.

Other facts about diagnostic testing of potential interest to sales reps:
• Larger veterinary practices (measured by the number of vets in the practice) conduct diagnostic tests for more pets than do smaller practices. Forty-five percent of respondents with one- or two-veterinarian practices test a majority of their clients’ pets, compared with 65 percent of respondents from practices with seven or more veterinarians. “These ?ndings are consistent with our belief that larger animal hospitals tend to perform more sophisticated medical procedures and are more likely to share best medical practices among each other, both of which drive more diagnostic testing,” according to the authors. And, if it’s true that practices are growing in size, then the future looks bright for diagnostic testing.
• There’s plenty of room for growth. Looking at all responses, only 51 percent of hospitals perform diagnostic tests on a majority (i.e., greater than 50 percent) of pets. “[This] leads us to believe that there are still significant growth opportunities ahead in the diagnostic market,” according to Blair.
• Another bright spot: Hospitals with specialists tend to conduct more diagnostic tests than those without them. Of the 168 respondents who work in a hospital with specialists, approximately 60 percent conduct diagnostic tests on a majority of the pets treated, compared with only 44 percent of the 634 participants from practices without specialists. As young vets opt for specialization, the volume of diagnostic tests may rise, according to the study’s authors.

Selection of diagnostic equipment and services
Eighty percent of respondents said that “faster turnaround time” is the most important reason for performing in-clinic testing. As was the case in 2008, the data indicates that the chemistry analyzer is the most frequently used piece of equipment. Nearly 31 percent of respondents indicated that between 76 percent and 100 percent of all in-clinic tests are run on a chemistry analyzer, and more than 55 percent of respondents indicated that chemistry analyzers account for more than half of all in-house testing.
When asked for the most important factor when choosing a reference laboratory, 68 percent cited quality of results while 19 percent cited turnaround time. Only 6 percent cited price. Nearly 62 percent send their samples to only one reference lab. Among those, 48 percent use VCA Antech, 35 percent use IDEXX Laboratories, 6 percent use a university lab and 11 percent use other laboratory service providers.

Capital equipment a bigger factor
High-tech equipment may become a driver of long-term growth in the vet industry, as it has in the dental industry, according to William Blair. Digital radiography will lead the growth in capital equipment spending, according to 55 percent of the survey respondents. “Although veterinary equipment is fairly early in its life cycle (typically only 3 percent to 5 percent of vet office expenditures), as care for animals becomes more sophisticated, we believe equipment will likely become an increasingly important part of veterinary practices,” conclude the study’s authors.
Forty-two percent of respondents said that spending on capital equipment will increase, while 12 percent believe it will decrease. To be sure, the numbers reflect the economy. Last year, 54 percent predicted growth while just 3 percent predicted a decrease. “We are not surprised that fewer people expect to spend more on capital equipment, given the state of the economy,” write the authors. “In fact, we were surprised that so many people continue to expect spending to increase.”

Views on distributors
Most respondents – 81 percent – indicated they use more than one distributor for their supplies and pharmaceuticals, which is comparable to prior years, according to William Blair. Butler was cited most often as the primary distributor, while Webster and MWI were the second and third most frequently cited.
Approximately 14 percent of the 878 respondents said they use a primary distributor other than one of the top 7, that is, Butler, Webster (including Columbus Serum, which it acquired in October 2008), MWI, NLS/Schein, PVP, American Health International/DVM Resources and Vet Pharm). “This supports our theory that the vet distribution market remains fairly fragmented with many regional players,” according to the report’s authors.
That could be good news or bad news for small independents. On the one hand, collectively, small players still control a good chunk of the business. On the other hand, as William Blair points out, they present attractive acquisition candidates for big wholesalers looking to broaden their geographic footprint. “We expect continued consolidation in the coming months, as MWI and Webster push for a more uniform national presence (MWI pushing east and Webster pushing west) and because the difficult economic environment may force smaller players to sell or close their doors.”
Price and delivery turnaround time are the two most important factors when choosing a distributor, according to survey participants. Thirty-nine percent cited price (compared with 40 percent a year ago) and 30 percent cited delivery turnaround time (compared with 31 percent in 2008).

Sales rep relationship
Twelve percent of respondents cited their relationship with their sales rep as one of the most important factors when choosing a distributor (compared with 10 percent a year ago). “Compared with past results, we have noted that sales rep relationships have become increasingly important, while price is less of a factor, implying that in these more difficult times, the trust built up between a practice and its rep is more important than ever,” according to the authors. “Although there has historically been a lack of differentiation between the majority of distributors, more responsive delivery and, implicitly, better customer service appear to be becoming a more important part of the distributor selection decision.”

Bullish on the industry
Overall, William Blair is bullish on the veterinary industry and the suppliers who service it. Although the report’s authors admit they would “not be surprised by continued slowing in companion market growth rates in the short term,” the long-term view is positive. “Combined with the industry’s strong cash ?ow characteristics, solid growth prospects, and relatively recession-resistant nature (again, not immune, but resistant), we believe these investment attributes make veterinary healthcare providers compelling long-term investment opportunities with numerous core-holding investment attributes.”

Editor’s Note: Veterinary Advantage readers wishing a copy of the 2009 Veterinary Survey should e-mail the company at info@williamblair.com.