January 27, 2015
MWI sale reflects trend in pet-related industries
Veterinarians wonder how service, prices will fare
By: Edie Lau
For The VIN News Service
MWI Veterinary Supply Inc.’s sale to AmerisourceBergen Corp. will turn a business founded by a veterinarian to serve nearby colleagues into a branch of one of the nation’s largest drug wholesalers.
Photo by Pete Grady
MWI Veterinary Supply Inc., headquartered in Boise, Idaho, employed 1,867 people in the United States and 302 in the United Kingdom as of Dec. 31, according to the company.
The $2.5 billion deal was announced this month.
The head of AmerisourceBergen, which sells drugs for human patients, pointed to the lucrative promise of the international animal-health market in explaining the company’s interest in the sector.
“With improving demographics and anticipated annual market sales growth rate of 6 percent, the total global animal health market and $22 billion medication and vaccine segment offer a compelling opportunity to diversify our business into new markets while staying within the pharmaceutical channel,” Steven Collis, president and CEO of the company, said during a conference call on Jan. 12.
Collis added, “The customer base of veterinarian and agricultural customers is robust, diverse and fragmented.”
MWI is one of the three largest distributors of veterinary medications and other animal-health products in the United States. It also owns a veterinary-supply business, Centaur Services Ltd., and a practice-management software developer, Vetspace Ltd., both in the United Kingdom. MWI’s chief products are veterinary drugs, parasiticides and vaccines. It carries diagnostic equipment and pet food, as well.
Many in the animal-health industry hailed AmerisourceBergen’s purchase of MWI. “I think it’s fantastic,” said Stacy Pursell, founder and CEO of The Vet Recruiter, an employment and hiring consultancy. “It’s a vote of confidence in the animal-health market.”
Practicing veterinarians who buy drugs and other supplies from MWI and its competitors tended to be leery. Some mused that the news won’t prove so good for MWI customers.
“The genie in my crystal ball is predicting price going up, while service is going down!” Dr. Warren Kaplan, a veterinarian on Long Island in New York, commented on a message board of the Veterinary Information Network, an online community for the profession. “Gotta maximize those profits, or the Wall Street analysts will have the CEO’s guts for lunch!”
Under the sales agreement, AmerisourceBergen will pay $190 per share in cash for MWI, totaling $2.5 billion. The payment represents a premium of nearly 9 percent on the stock price at the time the announcement was made, according to TheStreet, a financial-news outlet. The transaction is expected to close in March.
MWI CEO Jim Cleary acknowledged that the AmerisourceBergen offer, which was unsolicited, is lucrative for his company’s investors. “Our shareholders will receive an immediate, certain and premium value for their shares … ” he said in the conference call.
At the same time, the high price puts “an undue amount of pressure” on the new owner to make the purchase worthwhile for its stockholders, said Rich Morris, CEO of The Veterinary Cooperative, a purchasing organization for veterinary practices.
The price relative to MWI’s earnings before interest, taxes, depreciation and amortization — a figure called EBITDA in Wall Street parlance — is “out of this world,” Morris said. MWI’s EBITDA in the fiscal year that ended Sept. 30 was $132.97 million, according to TheStreet. The price AmerisourceBergen is paying for MWI is nearly 19 times that amount.
Morris, whose cooperative is not an MWI customer, speculated that the sale could be followed by employee layoffs and “stealth price increases” along the lines of delivery charges, higher prices on items that don’t sell well or smaller manufacturer rebates.
AmerisourceBergen and MWI did not talk about product prices during the conference call. In an interview with the VIN News Service, MWI spokesman John Ryan, when asked about possible price increases under the new owner, said, “I can’t guarantee anything, but we can say that their focus is to grow our business.”
Regarding the prospect for employee layoffs, Ryan quoted from a letter from MWI to its customers announcing the sale: “AmerisourceBergen recognizes that MWI’s people are our greatest asset.”
Pursell, the veterinary industry recruiter, said any job losses would be one drawback of what she considers overall to be a positive event.
As for maintaining high customer service, that’s a priority, AmerisourceBergen Executive Vice President and CFO Jim Guttman indicated during the call with investors. Noting that MWI has 25,000 stock-keeping units, or individual items, Guttman said: “There are a lot of opportunities to automate within the distribution centers, but we won’t do anything to jeopardize the high customer-service levels that MWI has. We think the service levels are critical ...”
MWI CEO Cleary, citing the size difference between AmerisourceBergen, with $120 billion in revenues, and MWI, with $3 billion in revenues, said he expects the new owner’s resources to help improve customer service and efficiency. For example, he said, “When we look at ... the way they run their distribution centers and compare them to ours, I think with some investment in our distribution centers, we’ll really be able to improve the efficiency and quality …”
Generally, Cleary added, “I think AmerisourceBergen can just help us grow at a faster rate. … There will be things like technology investments … customer-interfacing technologies, more international experience — those are areas where I think AmerisourceBergen bringing us that knowledge base will be really helpful.”
Structurally, MWI will be a subsidiary of AmerisourceBergen, and Cleary will be on the company’s executive team, “reporting directly to me,” AmerisourceBergen CEO Collis said.
MWI was founded in 1976 by Dr. Millard Wallace Ickes, a practicing veterinarian in Idaho. According to referenceforbusiness.com, it began as “a shoestring affair operating out of the hospital,” with Ickes cutting costs by ordering pharmaceutical supplies in bulk and selling what his hospital didn’t need to nearby veterinarians and suppliers.
Eventually, the business outgrew the hospital, and Ickes, after more than 25 years in practice, turned his full attention to the distributorship.
Ickes sold the operation in 1982 to Agri Beef Company but remained with the company until his retirement in 1992. In 2002, a venture capital firm acquired MWI. In 2005, the business went public. Ickes died in 2008 at the age of 88, according to an obituary in the Idaho Press-Tribune.
In becoming an AmerisourceBergen subsidiary, MWI will join forces with one of the three biggest drug wholesalers in the country. The others are Cardinal Health and McKesson. Together, the trio has between 80 percent and 95 percent of the market, judging from varying reports.
AmerisourceBergen’s move is the latest of several by companies and investors to enter pet-related markets. As Ron Brakke, a veterinary industry consultant, commented in his Jan. 16 newsletter, “Currently, animal health is one of the places where investment is being encouraged.”
Jackie King, executive director of the American Veterinary Distributors Association (AVDA), had a similar observation. “People have gotten so connected to their animals,” she said. “...That’s where most of the companies want to be.”
As an example, a group of investors bought out the retail chain PetSmart for $8.7 billion, a transaction identified by the New York Times as the biggest private-equity deal of 2014.
A separate but related ongoing trend is consolidation among veterinary distributors. King at the AVDA said her organization had 21 distribution-company members in 2009; today, the number is 13.
MWI is not the first veterinary distributor to become part of a company involved in human medicine. Henry Schein deals in medical and dental supplies as well as veterinary supplies. Patterson Companies, owner of Patterson Veterinary Supply Inc. (formerly Webster Veterinary Supply Inc.), also deals in dental supplies and rehabilitation supplies.
Speaking to an acquaintance in human health-care distribution recently, King said she asked, “What do you think of the acquisition of one of my biggest distributors?” The colleague quipped that AmerisourceBergen is becoming “Amerisource Barkin.’ ”
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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