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March 5, 2012

A growing cluster of companies caring for your pet’s health eyes a $51B market

Photo/Tim Greenway Jean Hoffman, president and CEO of Putney
Photo/Tim Greenway Ben Shaw, CEO of Direct Vet Marketing in Portland, sits with Paris, the company's office dog
Photo/Tim Greenway Jonathan Ayers, CEO of Idexx Laboratories, shows off the company's new iPad application for vets

The country's economy has been in a recession for the last several years, but you wouldn't know it by looking at the amount of money people are spending on their pets.

In the past decade, expenditures for pets — food, supplies, visits to the veterinarian — grew every year in this country, from $28.5 billion in 2001 to an estimated $50.8 billion in 2011, according to the American Pet Products Association.

The potential of the pet market has not been lost on Maine entrepreneurs. Several startups have popped up over the years to take advantage of its growth. Some, like, Mutt Nose Best and The Muddy Dog, target pet supplies. But the real entrepreneurial activity in Maine is focused on another piece of this lucrative market: veterinarian and pet health products.

The Portland area now has a small cluster of companies offering pet-health-related goods and services to veterinarians. The biggest — and first — player in pet health is Idexx Laboratories in Westbrook. Other Portland-based companies, such as Putney, Direct Vet Marketing and VetEnvoy, are also pinning their futures on growth in the pet health marketplace.

“I think it's a growing cluster,” Jonathan Ayers, Idexx's CEO, tells Mainebiz. “We're absolutely delighted to have other, complementary companies in the Portland area. We think that is very positive.”

Portland's pet health cluster overlaps two larger clusters — biotechnology and information technology. Idexx is solidly in the biotech sector, with its pet-focused diagnostic tests and lab services for veterinarians. It's also a strong player in information technology, with a recently released iPad application that veterinarians can use to better communicate with pet owners (see “The right touch,” Mainebiz, Nov. 14, 2011.)

Putney is targeting an untapped market in developing generic drugs for pets. Direct Vet Marketing, co-founded by David Shaw, founder and former CEO of Idexx, offers partner pharmacy services for veterinarians. VetEnvoy focuses on enabling paperless practices in the veterinary industry by connecting veterinarians and their customers to health care suppliers through VetEnvoy's hospital software. It recently received a $21,000 seed grant from Maine Technology Institute to develop its software hub.

People at these companies cite the usual benefits of having a core nucleus of companies working in the same realm: a critical mass of human potential, focus of attention from service vendors, heightened innovation because of cross pollination, etc. But the potentially limiting factors that affect the biotech and information technology clusters also affect these companies: access to capital and attracting top talent, especially in the sciences.

Where it’s been; where it’s going

It was Idexx that first targeted the pet health market. The company was founded in 1983 to produce diagnostic kits for the poultry, swine and cattle markets. In 1988, it introduced its first diagnostic tests for veterinarians to use with “companion animals.” In 2011, revenue from Idexx's companion animal group was just shy of $1 billion — most of the company's $1.22 billion in total revenue, Ayers says.

“We still have an important livestock and poultry and diagnostic business, but the companion animal group is 82% of our revenue today,” he says. “It became the major portion of the company very quickly in the late '80s and early '90s. We've continued to build out the product portfolio, primarily through R&D, product development and innovation. Now, we're a global player.”

Another big player in the market is Putney, which President and CEO Jean Hoffman, a pharmaceutical industry veteran, founded in 2006 after noticing a dearth of generic, affordable drugs while caring for her aging cat, Dude. Hoffman discovered that while 79% of drugs for humans have generic equivalents — which save consumers more than $3 billion a week — the percentage of pet drugs with generic equivalents is only 6%. Since most pet owners pay out of pocket, she realized that the high cost of drugs was probably preventing some from providing the necessary level of health care for their pets. “This need struck me in the heart, as a lifelong pet owner and animal lover,” she says.

At the time, she was working for her first company, Newport Strategies, which collected and analyzed data for the human pharmaceutical industry to identify research and market trends. Using her knowledge of the industry and the analytic software she developed for the human drug market, she found products that were attractive to develop as generics. “Once I had put together a list of drugs with projected revenues that topped $100 million, I knew I had a company worth building,” she says.

Retail sales of pet medications, including sales through veterinarians, brick-and-mortar retailers and online pharmacies, were estimated at $6.7 billion nationwide in 2011, according to a recent report from the market research firm Packaged Facts. Putney now has two generic pet drugs on the market: Putney Carprofen Caplets, introduced in 2009, and Putney Ketamine, introduced in 2010. The company, which posted more than $10 million in revenue last year, has about 20 other generic drugs in the pipeline, Hoffman says.

In October, Putney received $21 million in venture capital — the company has raised more than $30 million since its launch in 2006. It announced that it would use the funds for product development and to strengthen its management team. In January, Hoffman hired TJ Dupree as chief operating officer. Dupree came from Idexx, where he was corporate vice president of the companion animal group. It will be Dupree's job to shepherd the company's developing products to market. It won't be easy, Dupree recently told the Bangor Daily News.

“We are a very small fish in a big pond full of sharks. There are a lot of branded pharma companies who we are challenging, and they are not interested in our success,” Dupree told the newspaper. “We have to recognize that while we have a fantastic message, getting that message to veterinarians and pet owners is ultimately work. We are going to have to do things differently — leverage technology and social media in ways they have not.”

Two other Portland companies in the pet health market have ties to Idexx. Kevin Grant, a former Idexx employee, founded VetEnvoy in 2008 to help veterinarians with electronic communication between their customers, health care suppliers and other providers. And David Shaw, Idexx's founder and former CEO, is now co-founder and chairman of Direct Vet Marketing, which offers vet-sponsored pharmacy services for veterinarians through its websites, Vets First Choice, MyVetsMeds and VetCentric, which it acquired in January. It's a way for veterinarians to compete against companies, like Target, that are opening national pet pharmacies.

“We have seen tremendous pressure on veterinarians from Internet pharmacies such as 1800PetMedExpress and others, as well as thousands of retail pharmacies that now offer pet pharmacy services,” says Ben Shaw, Direct Vet Marketing's CEO and David Shaw's son. “And so the market has become very competitive. These Internet pharmacy and retail pharmacy providers create the perception of lower price, but this if often a false promise.”

Another company that tried to establish itself in the market didn't succeed because of funding issues. Todd Paige left a position at Idexx to launch Pet Health Network (not to be confused with the website that Idexx launched recently) in 2005. The company was developing digital display tools for veterinarians to use in their practices. It plugged along for a few years, receiving funding from the Maine Technology Institute and the Small Enterprise Growth Fund, but it ultimately didn't pan out. The culprit?

“Funding, funding, funding,” Paige says. “MTI played a great role, as did SEGF and Maine Angels. But despite strong customer interest, ultimately we desired to reconfigure our technology and business plan, and that needed more funding than I would ever imagine — which would have bought time — and the economic climate was poor in 2009 for that, since investors were all in defense mode.”

Idexx eventually purchased the assets of Pet Health Network, including the name. Paige is again an Idexx employee.

Idexx has acted as an anchor for the Portland area's pet health sector, but its effectiveness in further developing the cluster will ultimately be limited by its for-profit status, says Charlie Colgan, professor of public policy and management at the University of Southern Maine's Muskie School of Public Service. “Long term, if Portland is going to be a center for this industry, it will need to be anchored in some organization doing R&D,” Colgan says. “Idexx is one candidate, though it will probably work to limit the extent to which its own R&D becomes used by its competitors, so it is a limited anchor.”

What would be ideal, Colgan says, is a veterinary medicine school in Portland, though that's an unlikely prospect. In lieu of that, Greater Portland companies in the pet health market should seek to form stronger connections with Tufts University's Cummings School of Veterinary Medicine, he says.

Putney is working to strengthen its relationship with the Cummings school. It donates its Carprofen to the school's Luke and Lily Lerner Spay/Neuter Clinic. And Nancy Zimmerman, Putney's director of professional marketing, is working to establish educational programs to inform students at the Cummings school about generic equivalents and the advantages of prescribing them in their future veterinary practices, says Susan Hanley, Putney's director of communications.

Joe Migliaccio of the Maine Technology Institute, another former Idexx employee, doesn't agree that Maine's pet health cluster needs a veterinary medicine school or a nonprofit R&D institution to drive future growth. “The crossover between traditional biotechnology and information technology will continue to drive future growth,” he tells Mainebiz. “Veterinary science is not very different than human health. Bioinformatics, telemedicine, personalized medicine, and of course evolving payer models such as pet health insurance, all play into the future of high growth opportunity.”

Financing a trip to the vet

To understand the pet health market better, we need to look closer at spending for pets. While total expenditures have grown year over year, reaching $50.8 billion last year, those raw numbers can be misleading. The American Pet Products Association's report shows that spending on visits to the veterinarian grew from $13 billion in 2010 to $14.1 billion in 2011. But the available data shows that vet visits have actually dropped in the past several years. Last year, in the Bayer Veterinary Care Usage Study, 51% of 401 veterinarians who were surveyed reported that patient visits had decreased in the past two years. Expenditures rose, it turns out, because vets have been increasing their fees, Hoffman says. “That is a dangerous spiral as pet owners are not willing to keep paying more, as evidenced by the decline in visits,” she says.

Putney has market research that shows a 14% increase in the number of pets treated and a 9% increase in revenue for vet practices that offer a generic Carprofen — a drug in the non-steroidal anti-inflammatory category — compared with practices that offer only the expensive, branded drug, Hoffman says. According to the Bayer study, 47% of dog owners and 54% of cat owners said they would take their pets to the vet more often if each visit cost less.

Ayers at Idexx echoes Hoffman's belief that owners would take their pets to the vet more often if it were more affordable. But, conversely, he says pet owners would be willing to spend much more if they truly understood the value of quality health care for their pets. “There's a huge opportunity there, because the level of care provided today is a small fraction of what we know pet owners would do if they fully understood the value,” Ayers says. “They would devote more of their discretionary income to their beloved family member — and they do — when they understand that it's a really good thing for that family member.”

As a result, Idexx has pushed strongly into the information technology side of the pet health business. It was first to market with an iPad app that enables veterinarians to pull up lab results and X-ray images and discuss treatment plans with pet owners. It also recently launched a website, Pet Health Network, to act as a clearinghouse of information about pet health. And it's clear that pet owners must be educated. According to the Bayer study, 53% believe that routine checkups are unnecessary.

The iPad app and the Pet Health Network are attempts to help veterinarians become more effective at treating pets through effective communication. “That communication between the veterinarian and pet owner — there's a big gap there and veterinarians haven't known how to bridge that gap,” Ayers says. “And now we're giving them the tools to bridge that gap, and when they start adopting these and other good management techniques within the practice, their practices grow even though the economy is not growing, and that's how we would get pet health care growth in a sluggish economy.”

And, of course, when veterinarians are happy, Idexx is happy. “We're only successful when they're successful,” Ayers says. “We can only grow if they grow, and so it's about expanding the market.”

Ayers could be speaking for any of Portland's pet health companies. Each one has its mission to help veterinarians operate more efficient and effective practices. For these companies to continue to grow, they need veterinarians to raise their game and be successful.

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