And then there were four. When Boehringer-Ingelheim bought Merial in early 2017, the veterinary drug manufacturers consolidated to four major players – BI, Zoetis, Elanco and Merck (“The Big Four”). There are other, smaller manufacturers but there are really only four players with scale, size and comprehensive product lines. What does the consolidation mean for the veterinary industry? How is it impacting the distributors – Schein, MWI and Patterson?
The Changing Dynamic in Manufacturing & Distribution:
In business, scale and size matter. The Big Four all now have sufficient size to support sales forces to provide comprehensive coverage across the entire country. This wasn’t always the case. Back in the mid-2000s, when there were 15+ manufacturers, no manufacturer had enough size to support sales teams to adequately cover the country which made the distributors important. Manufacturers paid high fees to leverage distributor sales teams to promote their products to veterinarians. The distributors were an integral part of manufacturer sales strategies to drive growth. Today, BI, Zoetis, Elanco and Merck don’t need the distributor sales team – the distributors are primarily used to get a product to the clinic – a commodity service. This power dynamic is a fundamental change – in the early 2000s, the distributors had more ability to generate fees from manufacturers and now in 2018, the power has completely shifted to The Big Four, leaving distribution struggling.
The Lay of the Land:
IDEXX cut out distribution 2+ years ago by selling direct to clinics, and this move proved to be a big financial win for IDEXX (more profits for them since they no longer pay distributor fees). IDEXX proved that they could grow their business without the distributor sales people and now BI is the first drug manufacturer to follow this model.
Starting in 2019, BI is mostly cutting out distributors – to sell direct. You will still be able to order through the MWI, Schein or Patterson websites but delivery will be by FedEx or BI’s team and not the distributor. They are further commoditizing the distributors into solely order takers (eliminating delivery). We believe it won’t be long before Zoetis and then others go direct, especially if the move by BI is immediately successful.
What it all means for Distributors:
As for distributors, their world continues to consolidate as the manufacturers do so. MWI, Schein and Patterson are controlling a larger and larger share of the market as they continue to buy up the few remaining regional distributors to gain scale.
The big three distributors have each made different major strategic moves to try to compete in this new world. Here’s the lay of the land:
- MWI was bought by AmeriSource Bergen, a massive human healthcare distribution business, a few years back. In the human world, distributor margins are a fraction of the veterinary margins and MWI can learn how to run a lower cost, leaner business from its new corporate parent.
- Henry Schein has gone a different direction, selling its veterinary distribution business to Vets First Choice, an online pharmacy and data business. Schein owns a lot of technology assets – the Avimark and ImproMed practice management systems along with VetStreet for reminders and websites. Our view is that those technology assets have been under-invested in by Schein and Vets First Choice is counting on expanding its business through Schein’s sales force and figuring out how to improve the languishing technology assets it will inherit.
- Patterson completed a purchase of AHI, a major large animal distributor back in 2016/17 and it is unclear how else they plan to evolve in the ever changing market.
Even in the changing market, distributors are not going away. While the big four manufacturers control the vaccine market and have significant share in the flea, tick and heartworm segments, there are hundreds of other important but smaller products that need to be delivered to the veterinary clinic. The smaller players making generic and branded pharmaceuticals, providing medical supplies as well as equipment all need distributors to both promote their products as well as warehouse and deliver them. Distributors will need to evolve into leaner businesses that drive benefits to these smaller players that are fast becoming the key to their businesses – especially if and when the second of the four major manufacturers decides to go direct. The distributors are also increasing their focus on their own private label brands to drive sales and revenues.
Click here for a discussion what all this means for the individual veterinary practice owner and how you can best adapt your business to this evolving manufacturer and distributor world!