Tough Year, Tough Responses

For veterinarians, 2010 had its share of ups, and more than its share of downs. Their distributors shared their pain. Even so, distribution executives believe their companies – as well as their customers – will seize many opportunities for growth in the year ahead. And sales reps will be a big part of the picture, they say.
Vet-Advantage spoke with three executives to get their take on the year just past, and the year ahead. They were Jim Robison, CEO of Animal Health International; Mike Cavanaugh, DVM, executive director of the American Animal Hospital Association; and Mark Ziller, vice president for companion animal, Lextron.

‘Some great stuff going on’
Servicing production animal operators, animal health product retailers and veterinarians, Westlake, Texas-based Animal Health International must deal with a variety of market forces. “We’re very reliant on our customers’ economics,” notes CEO Jim Robison.
Net sales for the company declined 6.1 percent in the first half of FY 2010, but increased 7.5 percent in the second half. “Our beef business snapped back in the first calendar quarter [of 2010] – our third fiscal quarter,” says Robison. And he looks forward to fairly strong growth in the market for the next three to five years.
But the dairy market – while recovering – is not so robust, says Robison. Milk production remains strong, but demand remains flat. “We think dairy will pick up,” he says. “Exports and the restaurant trade will have to pick back up.” That said, supply will have to remain constant or be reduced in order for the industry to return to profitability. “And all of this will be impacted by grain prices,” about which uncertainty exists, he adds.
AHII’s veterinary business – specifically, its companion animal business – is strong. So strong that AHII intends to add three locations in the next year – one in northern Indiana or southern Michigan, one in Florida and one in Pennsylvania. The company’s recent addition of 23 to 25 sales reps from PVP will help.

Veterinarians not in the business of distribution
Commenting on the rash of mergers, acquisitions and buyouts that occurred among pharmaceutical manufacturers in the past 12 months, “other than creating challenges around manufacturing and supply chain management, they’re not really creating any difficulties for us,” says Robison. AHII experienced only a “slight negative margin impact” of Pfizer’s acquisition of Wyeth, largely because Pfizer sold off much of the Fort Dodge business to Boehringer Ingelheim, he says.
Although companies with very broad product lines may be tempted to try to bypass distribution and go direct, Robison doesn’t think that will occur. “We have found that over the years, the broader the line the company has, the more reliant they are on appropriate channel strategy, which allows for collaboration, reciprocation and minimal conflict while moving products through the channel.
“Our customers have been offered a proposition by major suppliers to buy direct, and that may work for some large animal health clinics,” says Robison. “But veterinarians aren’t in the business of distribution. We think acquiring companies will sort through their supply chain issues; some of the swings in gross profit margins will be mitigated; and things will normalize.”
Finally, despite all the mergers, the industry remains full of opportunity for smaller manufacturers, and hence, distributors, says Robison. “We’ve seen a lot of opportunities for emerging products and companies,” he says. For example, European suppliers seeking to enter the U.S. market need feet on the street. “I think there will be a lot of green shoots within our industries.”

The year ahead
Robison believes the future for the industry – and AHII – is bright. Consolidation in the dairy market should play to the company’s strength. “Approximately 60 percent of dairy cows are milked in herds of 500 or less,” he points out. There are tens of thousands of dairies with 60 to 100 head, and consolidation will ultimately occur. That’s good news for AHII, whose average dairy customer size is 1,200 head. “The obvious model [for dairy farming] is the dry lot dairy. We’ll continue to feel growth in that market.”
Robison sees positive developments stemming from Merial’s decision in late 2009 to drop its demand for exclusivity. “Our first and foremost mission is to serve our customers,” he says. “Based on that, we don’t think it’s appropriate for us to decide what we offer them.” Exclusives may work for the manufacturer, but they’re difficult to justify from the distributor’s or customer’s perspective. “To force a customer to cut another check simply to accommodate the manufacturer’s channel strategy is not a service-oriented mindset.
“Having said that, if a product is being carried to market, and the distributor is providing sophisticated services, such as assistance in selling and marketing, it’s incumbent on the manufacturer to have well-thought-out distributor policies and procedures in place, and to monitor them throughout the channel,” he says. “Manufacturers should have high expectations of their distributors; and they should clearly specify them, then hold their distributors accountable.” As distributors get larger and even more effective than they are today, the number of exclusives should stay steady or drop, he says. “And you’ll see tighter terms between manufacturers and distributors.”
Speaking of choice, Robison says AHII is happy to offer both branded pharmaceuticals and generic equivalents to its customers. “We believe choice is good,” he says. But at the same time, manufacturer’s investments in R&D and patents must be protected.
If there is a cloud on the horizon, it is potential government heavy-handedness, says Robison. “FDA policies, labeling fees and fees for submission of NADAs will constrict the supply of new products coming to market, and that’s not good,” he says. The FDA “must step up and become more expeditious in responding to requests from innovators.”

Veterinarians face competitive challenges
Distributors will be called on to help veterinarians facing competitive challenges from online sellers and retailers, says Robison. AHII, for example, has a program for producers called Vet Logistics Services, which allows its customers to offer their clients the option of ordering products online. AHII handles all the logistics and other back office operations.
Veterinarians aren’t about to cede product sales and distribution to online sellers and retailers, he adds. “Given the demographics of the pet universe, certainly in the United States, I think more money will be spent on products [purchased] at the vets’ office. More will be offered at the clinic or scripted.” Bayer’s decision in March 2010 to go over-the-counter could be the first of many more such decisions, he says. But many major players, including Novartis, Summit VetPharm and Elanco, remain committed to distribution. “We may see some high shifts, but within the companion market, vets will stay very active in the distribution of products.”
Veterinarians aside, one battle that may play out in the market will be that between online sellers and retailers, predicts Robison. “I’m guessing that 80 percent of the earnings associated with shipping to animal health owners’ homes by non-veterinarian providers is driven by the sale of diverted product. But as channel strategies are rationalized, those will come under scrutiny.”

Organizational changes
AHII has made organizational changes to improve its standing in the market, says Robison. Previously, the company was aligned around divisions, each of which had a general manager. It was holdover from the company’s legacy Walco business. “We didn’t have a common mission statement or vision, or a set of measurable metrics or quarterly MBOs,” he says. “We had no expertise around sales and operations management.”
Today, AHII has three general managers running the business, all with sales management and operations teams. Regional general managers supplement their efforts where necessary. “On both the operations and sales side, we’ve created expertise on the front line,” he says. “They have clear objectives. They’re aligned from a compensation standpoint for the pursuit of the same goals as the sales force and company as a whole.
“As a result, people are moving in lockstep, whether we’re pursuing specific fill rates, expansion of a geographic area, or launch of a new product line.” Throughout the organization, there’s a sense of accountability and follow-through, he adds.
With the new organizational structure in place, AAHI is excited about the future. “A number of key manufacturers have some exciting products they’ll launch,” he says. Extended-life parasiticides, new antibiotics and new vaccine technology are just a few.
“There’s a lot of great stuff going on,” he says.

Communication, leadership skills are must-haves for today’s veterinary practices
One year after assuming the post of executive director of the American Animal Hospital Association, Mike Cavanaugh, DVM, is excited about what lies ahead for the association, its members and the industry at large.
Born in Kansas City, Cavanaugh grew up in Topeka, Kan., and started pursuing veterinary medicine as a sophomore at Kansas State University in Manhattan. He graduated from the Kansas State University College of Veterinary Medicine in 1983.
AAHA has never been far from his blood. After working in several practices for five years, he opened his own practice – West Ridge Animal Hospital in Topeka – in February 1988. By May, the practice was accredited by AAHA. “I was really proud of that,” he recalls.
While still practicing, he began doing work for Hill’s Pet Nutrition on a consultant basis. “I found I really enjoyed it,” he says. By 1996, he reached a decision point: Either continue to practice veterinary medicine, or work for industry. “I had a junior partner who was interested in buying the practice, and I had a number of job offers from the industry side,” he says. “My mother always said, ‘If something is meant to be, everything falls in place.’” So he sold the practice and went to work for Heska Corp. in Fort Collins, Colo. He stayed in industry until January 2010, most recently serving as director of veterinary hospital services for Pfizer Animal Health. “It was a great job, and a great company to work for.”

The past year
Though he has been at AAHA only a year, Cavanaugh is proud of the work that has already been accomplished. “I’ve been able to connect with the staff and get a solid understanding of their challenges, of what keeps people coming back to work here,” he says. The entire AAHA staff has received training in the Oz Principle, which stresses personal accountability instead of blaming others. In addition, Cavanaugh has re-instituted member forums. When he and his staff are on the road, they make a point to meet with members and occasionally, non-members too, to listen to their concerns, and to ask and answer their questions. “We’re trying to build a stronger connection between [AAHA] leadership and our members,” he says.
Cavanaugh is also proud of the work of the AAHA Diagnostic Code Task Force and Review Board, which together with the Veterinary Terminology Services Laboratory mapped the AAHA Diagnostic Terms to a standard nomenclature of medicine (called SNOMED-CT®). “Slowly but surely, software vendors of veterinary practice management systems are starting to incorporate it,” he says. “When we get to the point where all practices are using the same diagnostic codes, we will have a unique capability to look at the incidence and prevalence of disease, which is pretty impossible to do today.”
He is also looking forward to rolling out new educational programs for veterinary practices, which, he says, will give members an alternative to traditional continuing education programs.

Challenges ahead
Cavanaugh places a premium on quality education as a way to meet the challenges of today’s industry. “It’s certainly a more complicated world today” than in 1988, when he opened his practice, he says. Corporate medicine, government regulations and the growth of private referral hospitals are just three examples of that complexity. Another huge challenge – and opportunity – for AAHA members lies in the huge number of pets, particularly cats, who currently do not see a veterinarian regularly, he says. AAHA is participating in an industrywide group to explore how the problem can be addressed.
Compliance is another challenge and opportunity. “We know that compliance rates for things like heartworm, dentistry and simple things, like vaccinations, aren’t nearly as good as what we think they should be,” Cavanaugh says. The year 2011 can be a time for practices to “go back and tidy up your own house.”
Veterinary practices can do many things within their four walls to improve their businesses and the welfare of their patients and clients, he continues. “A lot of practices suffer from cultural issues. They’re battling high turnover or staff issues, where people aren’t getting along. Communication is an area that is really important. I’ve been working in that area for the past seven to eight years – trying to help veterinarians and their staffs communicate more effectively, not only with clients, but with one another. It is an area AAHA will be paying a lot of attention to.”
Leadership is another issue that AAHA will address in the months ahead. “A lot of veterinarians are really, really excellent in terms of the scientific and biomedical component [of veterinary medicine], but not in terms of successfully leading people, to get them behind you, rallying for a common goal.
“If we can help more people at the top hone their skills and be more effective in terms of leading change in their practices and keeping people moving toward the same goal, I think many people’s lives will be better, including the veterinarian and their whole staff. There’s a lot of potential to help our profession in next five to 10 years.”

Growth opportunities still out there
In a tough year for the industry at large, TW Medical Veterinary Supply seemed to find plenty of growth opportunities. And the Austin, Texas-based company expects to find more in the year ahead.
In July, TW Medical – a wholly owned subsidiary of Lextron – reported that first half sales were up 22 percent over the same prior-year period. “We foresee strong double-digit growth for the remainder of this year and next year, despite the fact that we don’t think there will be anywhere near that type of growth in the industry,” says Mark Ziller, founder of TW Medical and Lextron’s vice president for companion animal. “We’re outpacing the industry and taking market share.”
The reason, says Ziller, is the company’s focus on growth and its long-range view of the future. “We’re investing in people, infrastructure and technologies. That focus on growth has been successful for us.”
TW Medical serves more than 1,900 veterinary clinics, as well as zoos, universities and research facilities.
Indeed, the company has undergone many changes in the past two years, the largest, perhaps, being its acquisition by Lextron in March 2008. “When we became part of Lextron, we gained access to a much larger set of resources and product lines, which has allowed us to expand even faster,” says Ziller. The following year, the company opened two new facilities – a West Coast distribution facility in Visalia, Calif., to serve a growing customer base in California, Nevada, Arizona, Oregon and Washington; and an 8,000-square-foot sales and training center in Austin.
The demise of PVP, while unfortunate, actually benefited TW Medical. “We hired eight sales representatives and one manager who were former PVP employees, and we’re excited to have them on the team,” says Ziller.

Tough year for customers
PVP’s closure “is a reminder to everyone that distribution is a challenging business, with very thin margins and little room for error,” he says. “The market has become very competitive. Distributors need to be efficient and skilled.”
To a large extent, the challenges facing veterinary distributors mirror those facing their customers. “The industry is struggling,” says Ziller. “But what we find interesting are the disparities in the market. Many customers are prospering and doing fine, while others are struggling, even in the same regions of the country.” Clinics that are well-managed and attentive to the business side of the practice as well as the animal-health side are well-positioned right now, he says. Those that have neglected the business side are facing challenges.
“Overall, we hear from our customers that business is down for them. Certainly that is concerning, and we’re working hard to help them.”
And there’s plenty that distributors can do, says Ziller. “A good sales force should be in the field talking to customers about their business, talking to them about their goals and challenges, and finding ways to assist them.”

Effect of megamergers
The latter part of 2009 and 2010 saw its share of significant developments on the manufacturing side – Pfizer’s acquisition of Wyeth, with its Fort Dodge animal health business; Merck’s combination with Schering-Plough/Intervet; Bayer’s decision to sell its products directly to pet stores and Internet pharmacies, to name a few.
“We’re all waiting to see how some of these megamergers will affect the industry long-term,” says Ziller.
Pfizer’s decision to sell on a direct basis many of the Fort Dodge products it retained was disappointing, he says. “It’s disappointing from the distributor’s perspective of lost revenue, but also because our customers prefer to order from their distributor – their one-stop shop. We hear from many of our customers who are disappointed.”
What’s more, it’s difficult to find a silver lining to Bayer’s decision to sell its products to pet stores and Internet pharmacies. “Our mission is to help veterinarians be successful,” says Ziller. “We believe the ethical channel is the appropriate one. It concerns us that a leading manufacturer in the industry chose to abandon it in favor of the retail channel. We’re disappointed, and we hope other manufacturers do not follow suit.”
On the other hand, Merial’s decision to drop its demand for exclusivity could be a harbinger of things to come. “We hope that more manufacturers will move away from the exclusivity model,” says Ziller. “We believe exclusives are bad for the industry and bad for veterinarians. No one product is the perfect fit for 100 percent of the market. One role of distribution is to get to know our customers, find out their particular needs, and then offer the most appropriate product.”

New clinic startups
If the number of clinic startups is any indication of the health of the industry, the outlook appears to be good, says Ziller. “We’re starting to see new clinic startups,” he says. That said, it’s difficult to say how long those startups have been in the planning stages. What’s more, TW Medical is seeing fewer “megapractice” startups. “We’ve noticed startups are a bit scaled down in size,” he says. “More attention is being paid to overhead and cash flow, which is a good thing.”
In order to successfully meet the challenge of online and retail competitors, veterinarians will have to revamp the way they charge patients for products and services, says Ziller. “We believe veterinarians are undercharging for their services. Consumers have a very high degree of respect and trust for their veterinarians. They respect the fact that they attended many years of veterinary school and have many years of experience.” These are things that online and retail competitors can’t match, he says.
“We believe veterinarians should charge more for services, and have a lower markup for pharmaceuticals and resale items. The totality of the charge may not change, but the allocation will.”
TW Medical’s reps can help their customers improve their charging methods, he adds. “Distributors have the advantage of seeing a broad range of clinics, in different markets and with different philosophies. We can share our observations with our customers, share best practices and tactics, and be a partner with the clinics.”
The future looks bright for the industry and for TW Medical, concludes Ziller. From a technology point of view, two bright spots are digital radiography and the latest generation of in-house chemistry and hematology analyzers, he says.
“In terms of digital radiography, the technology has now reached the point where there are some very good DR and CR systems available to veterinarians at affordable price points. They offer improved image quality, speed and lower cost.”
In addition, as veterinarians seek to increase revenue and improve care, many are revisiting in-house chemistry and hematology. “Over the past five to six years, analyzers have continued to get better, faster and easier to use. As veterinarians look around and ask, ‘How can I increase revenue?’ they’re coming back to diagnostics.”
Yes, the future brings with it uncertainty. But Ziller says that’s OK. “If you focus on the business fundamentals – taking good care of customers, and providing value and good service – there will always be business opportunities.”