Generic disruption awaits veterinary medicine

Sanofi’s new CEO Olivier Brandicourt has been in news for being in talks to either sell or list Merial, its animal health division. While Merial may not be a household name, the expected valuation of Euro 12 billion, makes us focus this week on the business of veterinary drugs.

If Brandicourt succeeds in its plans for Merial, the deal will play a pivotal role in getting France's most valuable company back on track and delivering on its five-year strategic plan, after the business was hit by lagging diabetes sales and boardroom rows.

In 2014, Americans spent approximately US $ 58 billion on their pets, including food, supplies, veterinary care, prescription and OTC medications. Approximately 65 percent of American households – or nearly 80 million homes – own pets, with dogs and cats being the most common. 

The global animal health market, which was US $ 23 billion in 2014, is expected to grow to US $ 33 billion by 2020.

 

Why the incumbents love the vet drug business

Every major pharmaceutical company from Pfizer, Merck to Bayer has a multi-billion dollar animal health operation (see the 2013 list of top 10 animal health companies). However, unlike human drugs where 85 percent of the prescriptions dispensed in the United States are generic medicines, veterinary drugs are quite the contrary – 86 percent animal drugs have no generic alternative. 

The incumbents love the business since the barriers to entry are currently extremely high. Animal health companies either sell directly to veterinarians or have an exclusive distribution agreement, and hence do not deal with middlemen like pharmacy benefit managers (PBMs).

Prescriptions are uncommon as veterinary practices usually also double up as pharmacies. Animal hospitals serve as one-stop shops. Therefore, generic competitors cannot enjoy the benefits of product substitution at the point of sale, as is the case with human drugs.

Brand lifecycles are managed for decades. Pfizer’s recently spun-off animal health division Zoetis generates 20 percent of its US $ 5 billion revenues from its top three products which have been in the market for 10, 15 and 26 years.

In addition, the R&D for pet drugs is considered to be more predictable, with a higher success rate, shorter cycle times and lower overall costs.

 

Retailers find it difficult to sell animal drugs

The animal health industry is gradually experiencing change. Alternative retail outlets have emerged in the United States (such as Petsmart and Petco) that offer online shopping along with brick and mortar stores. These stores generated more than US $ 10 billion in sales in 2014 sales and have also started providing consumers an alternative to veterinarians as the sole source of pet medication. (Click here to view the Petsmart store).

In its review of the industry – Competition in the Pet Medications Industry Prescription Portability and Distribution Practices ­­– the Federal Trade Commission (FTC) has estimated that in 2014, veterinarians accounted for 58 percent of sales of pet medications, while  brick-and-mortar retailers accounted for 28 percent and Internet/mail order retailers accounted for 13 percent.

In order to purchase a prescription pet medication from a retail pharmacy, a consumer must first obtain a “portable” prescription from the veterinarian. However, many consumers are either unable or unlikely to obtain prescriptions from their veterinarians.

Federal legislation introduced in 2011 mandated veterinarians in all states to provide portable prescriptions for every medication they prescribe, regardless of whether the client requests for it or not. The Fairness to Pet Owners Act (HR 1406) intended to help pet owners buy pet medications at the best prices. However, HR 1406 was not enacted and similar bills reintroduced in 2014 and 2015 in both the US House of Representatives and the Senate have met with little success so far.

Barriers such as prescription portability and exclusive product distribution agreements between animal health companies and veterinarians make it difficult for non-veterinary retailers to gain access to pet medications.

 

An industry all set for disruption

As the global demand for meat and milk increases and people in countries such as China, India and Brazil keep more pets as companions, the demand for animal health products is bound to increase significantly.

However, the signs of a shakeup are emerging as the use of antibiotics, which are consumed more by animals than humans, are now being seen as one of the biggest threats to global health. In recent years, companies including Tyson, McDonald's and Subway have pledged to reduce the use of meat raised on antibiotics. 

In addition, two of the biggest shopping days in the United States – Thanksgiving and Black Friday – saw store sales fall and online sales grow.  This indicates that more shoppers are likely to switch to online retail.

As health insurance coverage for pets tends to be limited, pet owners would be more concerned about the costs associated with pet ownership. This will lead to the emergence of cheaper alternatives, such as generics.

It’s interesting to note that most patents on the bestselling animal drugs have expired, making generic drug development easier.

In March 2010, Bayer became the first major drug manufacturer to begin selling pet

medications directly to non-veterinary retailers in an effort to address the unauthorized sale (also sometimes referred to as “diversion”) of its products outside of the veterinary channel. As an outcome, Bayer’s product are now available through both veterinary and retail channels.

With Pfizer spinning off its animal health cash cow, and now Sanofi planning something similar and Novartis selling its health business to Eli Lilly, there is every reason to believe that this market will take a different direction to the regular pharmaceutical business.

 

Our view

As competition in human generic drugs increases, generic animal drugs can become a sizeable opportunity for drug manufacturers in search of greener pastures.

Here’s an anecdote: Newport is the pharmaceutical business intelligence database used by most generic drug developers when they make strategic product portfolio decisions on the future course of their organization. Jean Hoffmann, the creator of Newport sold it to Thomson (now Thomson Reuters) in 2004. So what is Hoffmann doing now? She is busy developing generic animal drugs and her company is called Putney!

If you wish to learn more about animal drugs in the United States, view FDA’s publication – Green Book – which lists all approved animal drugs. It is similar to the Orange Book, which lists all approved human drugs.

 

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