Animal health companies move toward consolidation

Trend promises to impact veterinary medicine

Published: April 12, 2011
By Sally Ooms

The trend toward amalgamation of companies making and distributing animal health products continues with Lextron Inc.’s plans to buy rival Animal Health International (AHI) while Elanco makes a bid for Janssen Pharmaceutica NV.

While the two deals are different by nature, each of the companies involved have tentacles that reach deep inside the business of animal health and veterinary medicine. Acquisition and mergers across many health care sectors have been known to decrease competition and cause prices to rise while putting the squeeze on smaller companies in the marketplace. At the same time, the consolidation of resources could lead to new, innovative products and services, market analysts say.

The deal Lextron is expected to close by June 30 calls for the company to pay $111 million in cash to acquire AHI, which distributes drugs, vaccines and other veterinary products. With support from investment funds affiliated with Leonard Green & Partners, Lextron will acquire all outstanding shares of AHI for $4.25 per share and assume $140 million of the company's debt. The organization will be called Animal Health International.

“Lextron currently distributes 35,000 animal health products,” said Vice President and Chief Financial Officer Dave Wagley. “This is a merger of two companies who have experience in the animal health business for over 44 years.”

Meanwhile, Elanco, the animal health arm of U.S.-based laboratory Eli Lilly and Company has made an irrevocable, unconditional offer to acquire Janssen Pharmaceutica of Belgium. Financial terms were not disclosed. The union's finalization depends on whether European authorities approve the deal.

Elanco, an international company with a presence in 75 countries, has developed and made products for food animal production and livestock health for 55 years. Lately, it has expanded into the companion animal health market with pet medicines such as the parasiticides Comfortis, Trifexis and Assurity, as well as Reconcile, a drug designed to manage anxiety in canines.

Privately held Lextron, under its animal health division, does not manufacture drugs but distributes food and medications to veterinarians, dealers and poultry and livestock producers throughout the United States. Its animal feed technology division provides grain conditioners and a family of silage inoculants. Other divisions provide advanced veterinary services to swine and dairy producers, and specialize in manufacturing and blending of udder health products, dairy cleaners and sanitizers for dairy production.

Lextron's Wagley said he could not discuss product or distribution overlap or employee retention issues until the deal is completed. Lextron has 725 employees while Westlake, Texas-based AHI has 939.

AHI is a food and companion animal health distributor with 71,000 customers in the United States and Canada, where it handles more than 40,000 products from 1,500 manufacturers. The company was founded as family-owned Walco International Inc., but was sold in 1997, and went public under the AHI name a decade later. Its customers are veterinarians, production animal operators and animal health retailers. Products include pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment, sanitizers, pet foods, devices and supplies.

AHI has multiple operating divisions under different names. They include:

DVM Resources, which provides animal health products to companion animal and livestock veterinarians;
• Holt Products, which supplies equine and livestock markets with medications, supplements and equipment in the upper Midwest;
• Sunwest Industries, Holt Products' counterpart in the West and South;
• Hawaii Mega-Cor Inc., which distributes pharmaceuticals, vaccines and pet food to Hawaii, Japan, Taiwan and military bases in the Pacific Rim.

Several other businesses are branches of AHI, such as Kane Veterinary Supplies Ltd., the leading distributor of animal health products in Canada as well as pet and farm store products, including the company's own RXV, Agripharm and First Companion. The AHI subsidiary American Livestock and Pet Supply Inc., offers products for food and companion animals on-line and through catalogues. Other AHI subsidiaries include KVSL Financing L.P. and Walco Texas Animal Health LLC as well as Walco divisions in Mexico and Brazil.

With so much at stake, some suspect unscrupulous business practices are at play in the AHI-Lextron deal. Last month, the law firm of Carney Williams Bates Bozeman & Pulliam in Little Rock, Ark., sent out an investor alert announcing that the firm is investigating the AHI Board of Directors for potential breaches of fiduciary duty concerning the decision to sell the company to Lextron. The investigation focuses on whether the board conducted “an adequate and fair sales process to secure the best possible price for Animal Health shareholders prior to entering into a definitive agreement with Lextron.”

Attorneys from the firm did not return phone calls to discuss the status of their investigation. Officials with AHI also did not respond to queries from the VIN News Service.

Elanco's potential purchase of Janssen is attracting less negative attention. It is unclear how the deal might eventually impact Elanco's 2,300 employees working in 40 countries as well as the 128 people in animal health at Janssen — a company devoted more to human health, with more than 20,000 employees in its pharmacological business — though early signs point to growth and retention.

Elanco has a larger presence in the animal health arena, focused on protein production and companion animal medications. The company's food animal products include feed additives and medicines for cattle, swine and poultry. It currently produces a line that concentrates on four therapeutic classes: antibacterials, parasiticides, anticoccidials and productivity enhancers. Besides the United States, major markets exist in Australia, Brazil, Canada, Denmark, Japan, Mexico, New Zealand and Russia.

Jesse Sevcik, director of corporate affairs for Elanco, said the acquisition of Janssen will provide a more diverse portfolio in the disease segments, with a greater concentration in swine and poultry. “We will be obtaining more than 50 products,” Sevcik said. “A key point, too, is that Janssen has a significant presence in Europe and many other countries.”

Janssen, in business since 1953 and based in Beerse, Belgium, joined Johnson & Johnson group in 1961. The company focuses on pharmacological research and has worldwide research and development centers working on cures, mostly for humans, for a wide range of diseases — from mental disorders and neurological problems to infectious diseases and immunological disorders.

“We are in a position where we feel we must grow in Europe,” Sevchik said. “The acquisition will help grow our presence, not only in Western Europe but in other countries. Johnson & Johnson has been very successful globally. For example, they have 100 registered patents pending outside of Western Europe.”

Stefan Gijssels, vice president of communications and public affairs for Janssen’s Europe, Middle East and Africa division, said the animal health division has operations in 11 countries. He said it is active in biocides and veterinary medicines in the areas of parasitology, dermatology, behavior, metabolism and pain management. “It is a relatively well-spread portfolio with products for cattle, sheep and poultry, and fewer but significant ones for companion animals,” Gijssels said. “From antimicrobics, products against intestinal worms (in food animals) and to pills to combat obesity in dogs."

One of most attractive parts of the bid, he said, is that employees will remain in place. “With representation strong in Europe, we will build on current assets.”

Dr. Larry Hollis, a professor and the Extension Beef Veterinarian at Kansas State University, views the Elanco-Janssen union as a win-win for both companies. “Both are strong R&D companies. It should bring benefits to both.”

Hollis, who once ran a primarily large animal practice in the Texas Panhandle, also worked at two pharmaceutical companies prior to joining academia. He said he “knows the story from both sides.”

He considers further consolidation within the animal pharmaceutical industry to be potentially unfavorable to veterinarians: “The whole issue is the control of major pharmaceutical companies. As there become fewer and fewer companies, it could potentially raise prices to all veterinarians. Some animal owners may be more resistant to using veterinary services if the price of products they use keeps going up."

Hollis fears that the Lextron-AHI deal will create additional competition for veterinary practices that sell products. “In my practice, I found that my clients could buy cheaper from the distributors," he said. "I only kept emergency supplies on hand, or enough of the products I recommended to get producers started until they could buy from a distributor. Many large animal veterinary practices don’t even sell products today because they can’t compete."

In addition, competition between companies results in greater support for the veterinary community overall, he said.

“Companies are supporting things like 4-H and putting money back into organizations like local livestock owners and veterinary associations,” Hollis said. “The more companies there are competing, the more likely they are to support different events and meetings (through advertising). The organizations will have to raise membership dues on the local level when they lose corporate sponsorship. ...Lots of money currently flows downhill from these companies and could potentially dry up.”

Sally Ooms is a freelance journalist based in Taos, N.M.

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