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) • Confidential information; Property of Axxiom Consulting LLC Page 2

Consolidation … Confidential information; Property of Axxiom Consulting LLC Page 3

Consolidation Among Leading AH Companies Abbott American Scientific Labs AgriLabs (cattle bios) Agri-Bio Bayer NA Biologicals Chem Gen Alpharma Biotrends International Ciba Geigy American Cyanamid* Coopers Grand Labs Beecham Labs Harris Vaccines Ivy Labs Embrex Hoechst Roussel Vet Janssen Animal Health Fort Dodge ICI Lohmann Animal Health I.D. Russell IMC Maine Biological Labs Norden Labs Intervet* Monsanto (rBST) Pfizer Animal Health* Jen-Sal Novartis Pharmacia Mallinckrodt* Vet Life Smith Kline Pitman-Moore* Vineland Poultry Labs Salsbury Labs Schering-Plough* Wyeth Labs (Ireland) Solvay Sterwin Labs Synbiotics Syntro Vet Syntex Tri-Bio Upjohn *indicates past global #1 ranking Confidential information; Property of Axxiom Consulting LLC Page 4

Animal Health Is Increasingly Concentrated With Top 11 Manufacturers Representing >85% Global Animal Health Sales by MFG - 2015 $5,000 $4,000 $3,000 $2,000 $1,000 $- ZTS MRK ELA MER BAY BIV CEV VIR PHI VTQ DEC Confidential information; Property of Axxiom Consulting LLC Page 5

Post Merger, Top 4 Companies Will Cover > 50% of Global Traditional Animal Health Market Global Animal Health Sales by MFG - 2015 - Post Merger $5,000 $4,000 ? $3,000 $2,000 ? ? $1,000 ? $- ZTS BIV MRK ELA BAY CEV VIR PHI VTQ DEC Revenue Post Merger Confidential information; Property of Axxiom Consulting LLC Page 6

For North America, the Situation is Similar with the Added Complexity of BIVI Divestitures NA Animal Health MFGs Pre & Post BIV/MER Merger $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000 $- ZTS BIV ELA MRK BAY VIR CEV VTQ 2015 2015 POST MERGER Confidential information; Property of Axxiom Consulting LLC Page 7

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 • Confidential information; Property of Axxiom Consulting LLC Page 8

Choice & Competition Confidential information; Property of Axxiom Consulting LLC Page 9

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 on-line retail is up 15%, accounts for 60% of segment growth and 10.5% of 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 Confidential information; Property of Axxiom Consulting LLC Page 10

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? o If so, do you know in what way and at what rate? o Are you implementing a strategy to mitigate or, better yet, o leverage those key trends? Confidential information; Property of Axxiom Consulting LLC Page 11

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- ons, 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 Confidential information; Property of Axxiom Consulting LLC Page 12

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? 40% 35% 33% 30% 25% 22% 20% 16% 15% 15% 10% 8% 7% 5% 0% Existing New practices in my Corporate practices Big Box Retailers Online Pharmacies Spay & Neuter Competitors area Clinics and Non- Profit Organizations JAN 2015 Survey Results of 200 Eastern US Veterinary Practices (Community Veterinary Partners) Confidential information; Property of Axxiom Consulting LLC Page 13

The Five Forces that Shape Veterinary Industry Competition in 2016 Threat of New Entrants Specialty and referral practices Power of Power of Rivalry Among Suppliers Customers Existing Firms Dr. Google Low-cost providers Retailers & On-Line Threat of Substitutes Shifting consumer preferences driven by price and convenience are re-shaping pet medication sourcing and sales channels From “The Five Competitive Forces that Shape Strategy” by Michael E. Porter, Harvard Business Review, January 2008 Confidential information; Property of Axxiom Consulting LLC Page 14

Big-Box & On-Line Retail Growth Reflects Strong “Substitution” for Veterinary Sourcing Estimated Sales of Pet Medications by Channel $4,500,000,000 $4,000,000,000 $3,500,000,000 $3,000,000,000 $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 $500,000,000 $- Veterinary Big Box Retail On-Line Specialty Retail Nearly $ 3.0 billion in pet medication expenditures (~ 40% of total annual consumer purchases) now go through non-vet channels Sources: Veterinary Practice News 10.26.2015 citing Packaged Facts; Axxiom Consulting & Animalytix LLC Confidential information; Property of Axxiom Consulting LLC Page 15

As Big-Box Retailers, Amazon, PetSmart and Petco Emphasize E-tailing, Veterinarians Demur 35.0% 31% 31% 30.0% 25% 25.0% 20.0% 13% 15.0% 10.0% 5.0% 0.0% It's the predominant way We believe it's important We have a website and Our practice doesn't have we communicate with our but we don't have the that is sufficient to our a significant online clients time to stay on top of it needs presence 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 JAN 2015 Survey Results of 200 Eastern US Veterinary Practices (Community Veterinary Partners) Confidential information; Property of Axxiom Consulting LLC Page 16