December 21, 2009
2009 brought huge consolidations in animal health industry
Butler and Schein merger latest in a series
By: Edie Lau
For The VIN News Service
Big got bigger this year in the animal health world, which witnessed marriages involving four pharmaceutical giants and two top veterinary distributors, along with assorted smaller buyouts.
The series of high-profile combinations started with Pfizer and Wyeth/Fort Dodge, and continued with Merck and Schering-Plough/Intervet, creating the No. 2 and No. 1 animal health companies in the world, respectively. The year closed with an announcement that Butler Animal Health Supply would merge operations with Henry Schein Animal Health to form the nation’s largest veterinary distribution company.
Kevin Vasquez, chairman, president and chief executive officer of Butler, and soon to be CEO of the combined Butler Schein Animal Health, told the VIN News Service that the size and rate of consolidations in the pharmaceutical industry inevitably influence the actions of distribution companies such as his.
“We want to be a more valuable partner to our vendor partners,” Vasquez said. “If we can bring equal value to each other ... it makes for a grand relationship. Our vendor partners will see us as extremely valuable, in our reach in the marketplace.”
Some observers worried that attention to the needs of clients would be lost along the way. In a commentary published Dec. 4 in his weekly electronic newsletter, Ron Brakke, a longtime veterinary consultant based in Texas wrote: “Are any of these transactions occurring based on the needs of customers? Don’t think so!!”
“Big is not necessarily better, in my view,” Brakke said in an interview. “Big, if it’s well managed, is better. You have critical-mass advantages. But I think in a lot of cases, if you’re a smaller retailer, which is what a veterinary clinic is, you may be more interested in service; quick turnaround on what your needs are. That’s not to say that a big company can’t do it, but it becomes more difficult as it gets larger.”
Several clinicians expressed similar concerns. “Fewer distributors, less competition, what will happen to prices???” wrote Dr. Robert Knapp on a Veterinary Information Network (VIN) online discussion board. Knapp practices in Columbus, Ohio, not far from Butler headquarters.
“Make no mistake, costs will go up,” predicted Dr. Les Hatfield of Phoenix, in the same discussion.
But Jon Dittrich, a practice management consultant in Tennessee, said merging can be a smart business strategy that reduces a company’s expenses, enabling it to lower rather than raise prices.
By combining operations, he said, companies are “improving their efficiency to deliver more medical goods and services as a way of protecting their profits. ...That means they can sell at a lower cost.
"I say they can,” he added. “They don’t, necessarily.”
Vasquez said he does not anticipate prices going up, except where initiated by vendors.
Rather, he said, he expects the merged company to develop products that can help clinics run more efficiently, such as through software that enhances inventory control and the ability to capture lost charges.
Vasquez was aware of the popular impression that bigger companies are less agile and said he means to avoid that trap. “We have to make sure that no matter how large we become that we continue with that culture (of being responsive to customers),” he said.
The new company, formally scheduled to come into existence on Dec. 31, will be headquartered in Butler’s home base of Dublin, Ohio. If no one is laid off — a determination yet to be made — the company will have 900 employees and serve 27,000 clinics. Separately, Butler serves 25,000 clinics; Schein, 10,000. Most of them overlap.
Schein also has an international animal health business with more than 18,000 customers in Europe. That arm of the company will not be part of Butler Schein Animal Health, although Vasquez said he expects the operations to integrate eventually.
At the outset, Schein, a publicly traded company, will own 50.1 percent of Butler Schein, while Butler’s private owners, Oak Hill Capital Partners and The Ashkin Family Group, will own the remainder. In 2011, Oak Hill will have the option of selling its remaining interest to Schein; Ashkin will have the same option five years after the deal closes.
“We envision folding the company (completely) into Henry Schein somewhere down the road,” Vasquez said. “Then we will become part of the public company.”
In the meantime, Butler Schein may buy more companies. “This team thrives on this kind of growth,” Vasquez said. “We can’t get enough.”
Like a tale of big fish feeding on small fish, the histories of Schein and Butler illustrate the trend in consolidation in veterinary distribution through the decades.
Schein was founded in 1932 by Henry and Esther Schein as a storefront pharmacy in Queens, N.Y. In the 1950s, the company shifted focus to office-based practitioners — medical, dental and veterinary. In the 1990s, the company went public, began operating abroad and went on a binge buying other companies.
Schein significantly expanded its veterinary business in 2006 with the purchase of NLS Animal Health. NLS, once known as National Logistics Service, was itself the product of the merger of Barber and Lundberg, an Oklahoma enterprise founded in 1919, with A.J. Buck and Son Inc., a Baltimore firm started in 1937. NLS in 1999 bought Sunbelt Veterinary Supply of Alabama before it was, in turn, bought by Schein.
Butler was founded in Columbus, Ohio, in 1953. Private ownership of the company changed hands several times during the decades. Butler Co. acquired DVM Manager, a veterinary practice management software company, in 2002. Two years later, it merged with Burns Veterinary Supply Inc. of Texas, which itself had merged in 1983 with Delta Veterinary Supply, giving Burns national reach.
A look at membership in the American Veterinary Distributors Association (AVDA) tells the same tale: In 2002, the association had 72 members, 32 of whom were active distributor members. Today, counting Butler and Schein as separate entities, the AVDA has 68 members, 21 of whom are distributors. In short, the association has lost 11 distributor members in seven years.
The AVDA’s numbers of associate members, which include pharmaceutical companies, likewise are affected by the move toward consolidation. “They keep buying each other up,” said AVDA Executive Director Jackie King.
Not only does that affect the association’s membership, but many of the big associate members have been dependable sponsors of AVDA annual conferences. During a meeting in April reviewing the budget for the 2010 conference, King said, the AVDA board wondered how conservatively to budget, given the economy and changes among drug giants.
"We were all nervous about commitments from our past large sponsors,” she said. “With the Pfizer/Wyeth and Merck/Intervet/Schering Plough deals pending, concern was raised about whether they would continue to be large supporters of the conference as sponsors.”
As it turns out, the sponsorship is on track to exceed previous years’ totals, King said. At last count, the association had promises for $111,000, close to last year’s total of $119,000, with more commitments expected in the new year.
Sponsorships aside, the changing landscape of veterinary distribution remains worrisome to the association. “I do know that my board, which is comprised mostly of my distributor members, is concerned about, where are we going to be in five years?” King said. “What is the industry going to look like? Will there be only five major distributor players? The smaller, regional players, will they still be around?”
The changes influence everything from AVDA board composition to mission. AVDA bylaws prohibit more than one representative per company on the association’s board. Every time two companies with board members merge, someone has to step down. “It seems like it happens to us every year!” King said.
More significantly, the AVDA is compelled to consider what kinds of services best serve its ever-changing membership. For example, King said, in the future, the association may need to redesign its networking opportunities for an industry with fewer players. And it may find that the needs of small to mid-size members are quite different from those of large members.
At the moment, King counts six distributors with national reach: Animal Health International Inc., Butler, Lextron Animal Health, MWI Veterinary Supply, Henry Schein and Webster Veterinary.
A variety of regional players still remain. “If you’re a veterinary clinic, you probably can buy from as many as six or seven distributors today,” said Brakke, the consultant.
Of course, those regional players may themselves merge or be bought out over time. King said the growth of already-big companies inevitably affects smaller players. “I think they’re always looked at as a target for acquisition. I think there’s big pressure,” she said. “I anticipate, if it’s not two big guys coming together, it’s going to be big guys buying some of the smaller or medium ones.”
VIN News Service commentaries are opinion pieces presenting insights, personal experiences and/or perspectives on topical issues by members of the veterinary community. To submit a commentary for consideration, email firstname.lastname@example.org.
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