Golden-ticket scheme delivers prized information

May 15, 2012
By: Edie Lau
For The VIN News Service

Part 1 of 3: Veterinarian investigates illicit diversion of flea products

Part 2 of 3: Golden-ticket scheme delivers prized information

Part 3 of 3: Veterinarian opens up about going undercover

Editor’s note: A veterinarian wishing to penetrate the labyrinth of pet-product diversion sold more than $130,000 worth of the flea killer Frontline Plus to a broker in 13 months. This story, the second in a three-part series, describes how the veterinarian tracked which retail outlets ultimately sold the product to the public.

Kathy Swartz swung by the pharmacy at a Kroger store near her home in Mount Orab, Ohio, recently to pick up a prescription when she noticed the supermarket carried the flea remedy she uses on her dog and three cats. It wasn’t the cheap stuff that grocery stores typically offer but Frontline Plus, a premium flea and tick product that used to be available only from the veterinarian.

Swartz was excited. The price was about the same as she would pay at the clinic — $39 for a three-dose pack for cats — but the convenience was unbeatable.

Sheesh, I’ll get it here! she thought.

What Swartz didn’t know was that the Frontline Plus she picked up had not come to the store directly from the manufacturer. It first filtered through a veterinary clinic and at least one other business. The clinic had obtained the doses from the manufacturer as part of a nearly $40,000 order that it resold to WTF Wholesale Suppliers Corp., a dealer in “hard-to-find” pet products that acted as a middleman between veterinarians and retail outlets.

The products WTF deemed “hard to find” aren’t really — at least not for consumers. Pet parasiticides such as Frontline Plus are available seemingly everywhere: big-box stores, warehouse stores, drug stores, Internet retailers and pharmacies and now grocery stores. “Hard” describes the circuitous channels retailers tap to obtain the goods. Most manufacturers of premium flea and tick treatments have a policy of selling their products exclusively to veterinarians who treat pets.

The exclusive sales policy has given rise to an elaborate gray market in which brokers solicit veterinarians to place large orders on their behalf in return for commissions that reportedly range from 2 to 10 percent.

The veterinarian who resold the Frontline Plus that eventually landed in Swartz’s shopping bag diverted more than $130,000 of the flea-and-tick product between December 2010 and December 2011. She didn’t do it for the money — she donated the profits to an animal shelter and other charities in her community. Her purpose was to aid an ongoing examination by the VIN News Service of the duplicitous world of pet-product diversion.

Although diversion of non-prescription therapeutics is legal — except if conducted without a wholesaler’s permit in states that require one — it is considered unethical by the veterinary profession. Moreover, manufacturers may refuse to do business with known diverters.

At the same time, because products such as Frontline are so widely available and because making the product easy for consumers to obtain presumably benefits manufacturers’ bottom line, many veterinarians believe product makers secretly condone diversion. Manufacturers say that isn’t so; that they genuinely believe pets and their owners are better served when parasiticides are obtained from and used under the guidance of veterinarians.

The subject is a festering sore point in the community. For that reason, the veterinarian who diverted to learn about the process said she feared being shunned by her colleagues and asked to use the pseudonym Dr. Peggy Guy for this story.

Product ends up in chain stores

Cardboard boxes were stacked four deep in the hallway of Guy’s veterinary hospital the day she and two staff members began implementing a scheme to track where the Frontline Plus ended up.

The scheme was inspired by the children’s story “Charlie and the Chocolate Factory,” in which chocolatier Willie Wonka tucks golden tickets under candy-bar wrappers, promising finders a coveted tour of his mysterious factory.

In the veterinary version, golden tickets were taped to packages of flea treatment. Finders of the tickets were directed to call a toll-free number or visit a website to claim a $25 gift card. They were asked for their name, address and the name and location of the store where they bought the product.

Oval-shaped gaps in the shrink wrap around 10-packs of Frontline Plus provided handy openings through which the veterinarian and her staff were able to insert golden tickets. The tickets provided a low-tech method of determining the products' destinations.

Altogether, 264 tickets were slipped into packages of Frontline Plus. Inserting the tickets was a laborious process that took three people two days to complete. Working with packages shrink-wrapped in groups of 10, Guy and two helpers slid the tape and tickets through a handy gap in the shrink-wrap, taking care not to tear the plastic or mar the boxes.

In late November, two weeks after Guy finished shipping to WTF all the packages of Frontline Plus salted with golden tickets, the first consumer claimed a prize. The winner described herself as a pet owner who bought the flea product at a Fred Meyer pharmacy in Portland, Ore.

Since then, ticketed packages have continued to turn up. As of Friday, 18 consumers in six states — California, Kentucky, Michigan, Missouri, Oregon and Washington — had logged prize-winning tickets.

All but three tickets were discovered by shoppers in stores owned by The Kroger Co., one of the country’s largest grocery chains, with headquarters in Cincinnati.

On its website, Kroger touts the availability of hundreds of prescription veterinary drugs as well as prescription and non-prescription parasiticides in its pharmacies. Kroger’s corporate communications manager did not respond to repeated telephone calls and emails from the VIN News Service seeking comment.

Besides Kroger stores, Guy’s Frontline Plus turned up in a PetSmart in Midland, Mich., and at a Tractor Supply in Lebanon, Mo.

Both are chains: According to their respective websites, PetSmart has more than 1,320 stores in the United States, Canada and Puerto Rico, while Tractor Supply bills itself as the largest retail farm and ranch store chain in America, with 1,085 stores in 44 states.

PetSmart has in the past declined to discuss diversion with the VIN News Service. That stance hasn’t changed.

“We maintain our practice of declining to discuss our relationship with our vendors and suppliers for competitive and proprietary reasons. We can tell you that we’re confident in our vendor selection system and remain satisfied with the suppliers of our flea and tick products,” PetSmart spokeswoman Michelle Friedman said by email.

Tractor Supply did not answer requests for comment.

When WTF first courted Guy, the company represented itself as a supplier of farm and feed stores in Florida. The golden-ticket scheme belied that claim.

WTF went out of business last August and company officials could not be reached for comment. Kelly Parsons Kwiatek, a lawyer for WTF, did not respond to multiple emails and telephone calls. A company that took over transactions with Guy after WTF closed, True Lines Distributing Co., declined to comment; a spokesman who did not give his name demanded that the VIN News Service stop calling.

Pet owners extol convenience

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The VIN News Service interviewed several golden-ticket holders about their habits and preferences in buying pet flea and tick products. Almost all said that where they choose to buy Frontline Plus is based on convenience and cost.

Cara Knox of Newport, Ky., is particularly pleased that her neighborhood grocer is carrying the stuff. “I used to have to go all the way to Wal-Mart to get it. I live by Kroger’s and I found out they sell it there. So it works out really well,” Knox said.

She purchased enough Frontline Plus to treat her dog, her cat and her boyfriend’s dog when she came across the golden ticket.

When told that the manufacturer says it wants Frontline to be sold to pet owners only by practicing veterinarians, Knox replied, “A lot of people don’t even go to the vet. If it was only sold there, they wouldn’t be able to get it.”

Jenny Entenman of Sandy, Ore., remembers when Frontline was available only from veterinarians. She bought it regularly from her vet. But that was years ago. Now she buys it from Target or Fred Meyer (a Kroger store). “It’s more convenient,” she explained.

Similarly, Mandy Jackson of Springfield, Ohio, a long-time Frontline user, recalls buying it from the veterinarian. When pet stores began carrying it, she switched. But Jackson said both sources — clinics and pet stores — were pricey. She recalled paying $60 to $65 for the same size package and dose that she now buys at Kroger for $39.

Told that many veterinarians historically have used profits from flea and tick product sales to help keep their service fees lower, Jackson reacted with disbelief. “The fee just to come into the vet’s office, it’s still expensive,” she scoffed.

In Vancouver, Wash., Linda Burgess came across a golden ticket in a package of Frontline Plus her husband purchased at a Fred Meyer. When she learned that Frontline was supposed to be sold exclusively by practicing veterinarians, she said she was familiar with the concept.

“I’m a hairdresser and we have exclusive products that we buy and sell to the public, and (the manufacturers) swear they don’t sell to the stores. Then you walk into Costco or Fred Meyer and, are you kidding me?” Burgess said, expressing the same incredulity at seeing beauty products on store shelves that many veterinarians express when they see “exclusive” flea product offered outside of clinics.

“The gal I work with completely cleaned off her shelves of anything you can buy in stores now, it just made her so angry,” Burgess said.

Despite her personal understanding of the situation, Burgess said she would continue to buy flea medications at Fred Meyer for convenience’s sake. “The (vet) I like is too far away from the house, maybe 10 miles,” she said. “The store is just right around the corner.”

One golden-ticket winner was sympathetic to veterinarians’ position. After learning of their concerns about the proliferation of flea products outside of clinics, Swartz, the pet owner who had been delighted to find Frontline Plus at a Kroger in Ohio, said: “Maybe it’s best to buy it from the vet. ... They’re there for us when we need them. There’s no reason we can’t help them out.”

How to respond to diversion?

Before Guy began diverting, she personally had no opinion about it, she said: “As I do not live in flea and heartworm country, I have never had sales from these products coming into my practice.”

Now that she realizes the magnitude of business generated by diversion, she appreciates why some veterinarians are so deeply offended by the practice. “Looking at the amount of money that is being routed out of veterinary clinics and into third-party providers, I can understand why vets are upset.” She added, “I do not think that it will ever change.”

What could and should change, Guy believes, is the official line by Merial, maker of Frontline. In her opinion, she said, it is unethical for Merial to continue insisting that it opposes diversion even as its business practices encourage the activity.

“Merial needs to step up and admit (that) they are no longer selling to veterinarians only. Their game of pretending to not know is over,” she declared.

Donald Schwartz, Merial’s executive director for business services and business development, called the remark inflammatory and unfair.

“We don’t sell to anyone but veterinarians, and we don’t pretend not to know,” he said. “Of course we know that product is diverted. We have a system that really relies on the honor system and goodwill of veterinarians not to divert, since any veterinarian can take box one of Frontline and divert it.”

Schwartz said Guy’s experience diverting more than $130,000 in Frontline Plus and getting away with it proves nothing. “She’s a judge and jury of one,” he said. “The fact that she wasn’t caught doesn’t mean we don’t enforce our sales policy. It just means she didn’t get caught.”

Schwartz compared the problem to speeding: Drivers speed, cops know it and they catch some speeders some of the time. Others escape the law.

Asked why Merial doesn’t concede that the veterinarian-only sales policy is futile and give it up, Schwartz replied, “Just because people speed, we should do away with speed limits?

“At the end of the day,” he said, “what we’re trying to do is to make sure that veterinarians have access to our product without putting unnecessary barriers before them. Any veterinarian who tries to fool us and circumvent our sales policy will be able to. Eventually we will find them but they will be able to initially. I can’t be much clearer than that.”

Dr. Zack Mills, who until January served for six years as Merial’s vice president of U.S. companion-animal sales, allowed that Guy’s purchase level should have been noticed last year by the company.

After learning from the VIN News Service about Guy’s experience, Mills reviewed sales records and managed to identify her. He said her buying pattern actually had been noticed by the company during a year-end review and her clinic was placed on a watch list, a precursor to sending a limit letter that imposes a purchase quota based upon clinic size. As a result of his suspicions that the clinic diverted product, he moved to have the limit letter prepared without further delay.

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Guy received the letter a few days later. Under its terms, she is allowed to purchase $92,940 in Merial branded flea and tick products each year. The allowance is based on the assumption that a “well-managed practice” with one full-time veterinarian would see 1,216 dogs and 780 cats a year, and that 85 percent of their owners would purchase six doses of flea and tick product from the clinic.

The $92,000 limit made Guy laugh. Living in a dry climate where fleas aren’t an issue, she typically buys less than $500 worth of Frontline Plus to sell to clients each year, and spends less than $1,000 on all Merial products.

“When I looked at that, I thought, ‘Hell, I could live with this! One thousand for me and 91 to divert!’ ” she exclaimed, joking.

Guy speculated that other diverters are likely to have no problem working within Merial’s generous limits. In fact, when she first began doing business with WTF, the folks there told her to expect a “capacity letter” from Merial that would enable her to project how much product she could resell to WTF over the course of a year.

Later, when Guy told a representative at True Lines that she had received a limit letter, the agent interpreted the correspondence not as a warning from Merial, but the opposite: an invitation from the company to place another order. Amazed and incredulous, Guy said the agent told her that “the closer I am to my limit every year, the higher the limit goes.”

That is contrary to how Merial officials say they handle suspected and known diverters. Schwartz stated by email:

“Practices that have reached their limit of Frontline purchases are cut off from further Frontline purchases for one year,” he wrote. “The limit is based on an estimate of what one year’s supply of Frontline would be given (based on) the practice’s size and other criteria. The presumption is that further supplies of Frontline may be diverted since the practice has already received enough product for its own use.

“In contrast, proven diverters of Frontline have violated our sales policy (which covers all products) and therefore are cut off from all products indefinitely.”

Mills, the former Merial head of companion-animal sales, said he plans to return to private practice this fall and intends to recommend and sell Merial products, including the Frontline brand, to pet owners. “I believe in the products and I know how Merial supports the veterinary profession,” he declared.

He expressed surprise that other veterinarians continue to fret about diversion.

“We worry about too many stupid things,” he said. “Let’s take care of the business we have, and take care of the clients you have at your clinic and you’ll be fine. You’re always going to have to compete. Competition is not going to get better. Why? We live in America. In a capitalistic society, if you make profit, someone else is going to want to make that profit.”

Division over diversion deeply rooted

Dr. Paul Pion, president and co-founder of the Veterinary Information Network (VIN), which supported Guy’s foray into diversion, said the distress many veterinarians feel about the practice springs from a sense of betrayal.

“Veterinarians have traditionally been seen by manufacturers as the most appropriate and expedient route to introduce new products. They are the trusted experts on animal health,” he said. “(But) once the market is established through veterinarians, these veterinary-only products always seem to find their way into the gray market.

“I don’t think most colleagues have an issue with these products being available through other sales channels, if accompanied by proper education; flea and parasite control is a more complex topic than one might imagine,” he added. “But veterinarians are tired of being set up as exclusive suppliers and later finding that the product they are initially told needs their expert guidance to be used properly is to be found everywhere. That leaves them looking like greedy bad guys while the manufacturers claim to be doing what they can to control the flow of their product.”

Guy said if Merial truly agreed with the veterinary community that diversion is undesirable, the company might well view her experience as a help to the company in identifying and plugging leaks in its authorized sales channels. But judging from company officials’ comments to the VIN News Service, she said, they appear to regard her as a nuisance rather than an ally.

If that's so, Guy said she won’t be surprised if Merial opts to punish her as officials say they would any proven diverter. “If they are going to prevent my purchase of any product, then I am not sure I really want to do business with them anyway,” she said.

As for veterinarians who divert for financial gain, Guy has concluded it is not her place to judge their actions. “I don’t condemn those who are in a position of needing money so badly that they resort to diversion,” she said.

For herself, Guy said now that she has found answers to many questions about the flea-and-tick gray market, she is done diverting.

http://news.vin.com/VINNews.aspx?articleId=22523

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