Veterinary generics squeezed by blocking agreements

Zoetis, Merial bar big distributors from selling competing generic drugs

Published: September 08, 2015
By Edie Lau

VIN News Service photo
As with generic drugs for people, generic medications for pets can cost significantly less than the brand. The discount depends on the drug, dosage form and how many competitors exist. There are multiple generic versions, for example, of Rimadyl, a nonsteroidal anti-inflammatory drug for dogs. A VIN News Service spot check found a generic Rimadyl (carprofen) that cost less than half the brand.

In her daily quest to provide pet owners affordable treatments for their animals, Dr. Julia Lucas routinely seeks out generic versions of drugs. Finding sources for most generics isn’t simple, she discovered a couple of years ago.

The reason is that dominant veterinary-supply distributors in the United States are bound by exclusivity agreements with Zoetis, the world’s largest animal drug manufacturer, that prevent them from selling generic drugs that compete with the Zoetis brand.

Smaller distributors carry generics, but Lucas said making multiple calls to figure out who’s got what is impractical for small practices. Moreover, veterinarians may not even know to look for a lower cost generic because often they rely on big distributors to tell them what’s available.

“We are missing opportunities for our clients because we don’t get the whole information from our distributors,” said Lucas, a practitioner in Maine. “There may be a superior product or cheaper product that is of equal quality out there, but because our distributors may be limited (by) one of these contracts, we don’t have access to the whole information.”

The consequences can be big. Not knowing about or having access to a cheaper drug option, Lucas said, could result in a client forgoing treatment of a pet. Further, being able to offer clients more affordable medications “creates a sense of trust, so that helps us in every other aspect of patient service,” Lucas said. “They know we’re looking out for not just the dog, but them, as well.”

Exclusivity agreements, also referred to as blocking agreements, aren’t new in the industry, but a report released in May by the U.S. Federal Trade Commission about competition in the pet medications industry drew attention to their possible role in stunting the companion animal generics market.

Citing conflicting testimony from stakeholders, FTC staff did not determine whether the agreements do, in fact, impede competition. However, Jean Hoffman, president and CEO of Putney Inc., a leading manufacturer of veterinary generic drugs, has no doubt.

“Putney has achieved a lot of success with our generic drugs, but it has been slow and expensive because we haven’t had access to any of the national distributors for those products where Zoetis controls the brand,” Hoffman told the VIN News Service. “Where we have access, we are able to vigorously compete and achieve market share more rapidly.”

She added: “There’s no amount of money we can invest to make the blocking agreements go away. Distributors are very important to the fragmented veterinary market to getting product to the veterinarians.”

Zoetis declined to comment on specific distributor agreements or terms. In a statement provided by email, the company said, “In terms of generic competition, there are numerous routes to market for generic products outside of the distributors used by Zoetis … Manufacturers can also market products directly to pet owners by selling through one of the many online companion animal pharmacies.”

Distributors reportedly express regret

According to Hoffman, representatives of the three largest veterinary distributors in the country — Henry Schein Animal Health, Patterson Veterinary Supply and MWI Veterinary Supply — along with a larger regional distributor, Midwest Veterinary Supply, have admitted to being constrained by the contracts.

“They actually say, ‘We would like to carry your products. We can’t because of the Zoetis agreements.’ And every year, they’re waiting to hear what the new Zoetis agreement says,” Hoffman recounted. “It’s amazing how these large distributors are so tied by Zoetis.”

Contacted by the VIN News Service, officials of the distribution companies declined to comment or did not answer the inquiries.

Hoffman said other manufacturers of pioneer drugs may give incentives to distributors to promote their product rather than a competitor’s, but Zoetis goes much further. “Zoetis agreements are unique in that they tie a group of products together ... and the distributor will lose all the tied products if they sell the generic for any one of them,” she said.

She added that she understands losing the package of Zoetis products is a financial risk for distributors. “All this group of Zoetis products are products that veterinarians use every week,” Hoffman said.

An example of a contract with the restrictive clause is posted on The agreement from 2011 is between Pfizer Inc. and MWI. (Pfizer spun off its animal business to form Zoetis in 2013.) The clause reads:

“During the term of this Agreement MWI will not sell any other product or formulation containing carprofen, amoxicillin/clavulanic acid, or cefpodoxime proxetil other than those Products purchased by MWI from PFIZER including but not limited to any capsule, tablet, chewable tablet, drops or injectible carprofen, amoxicillin/clavulanic acid, or cefpodoxime proxetil product.”

Such agreements strike a direct blow to Putney, as the maker of three forms of generic carprofen, a nonsteroidal anti-inflammatory; and a generic cefpodoxime proxetil antibiotic tablet. Putney also makes generic versions of Zoetis’s Dexdomitor, a sedative and analgesic; and Zoetis’s Telazol, an anesthetic.

“The majority of our products are subject to Zoetis’s — and uniquely Zoetis’s — blocking,” Hoffman said.

chart on Putney’s website on where to obtain its products shows the only Putney offerings carried by major distributors are enrofloxacin in tablet and injectable form. Enrofloxacin is an antibiotic developed by Bayer Corp. with the brand name Baytril.

In addition to manufacturing pioneer veterinary drugs, Bayer has its own generic carprofen — a soft chew sold under the name quellin.

Bayer declined to say anything about exclusivity agreements in the companion animal generic drug market. “Bayer does not comment on other companies’ manufacturing or distribution agreements,” said company spokeswoman Lauren Dorsch.

Like smaller generics manufacturers, large brand-name drug makers may be stymied by blocking agreements themselves, to the extent that they, too, make generic drugs. Attorney Clinton Vranian described this experience at an FTC workshop on competition in the pet medications industry in 2012. According to the transcript, Vranian, who at the time was general counsel for Novartis Animal Health, said:

“We recently launched a generic version of a blockbuster product, and a differentiated generic, the one that had the off-patent molecule with a compound that provided superior efficacy. This product was well adopted by the vets that adopted it, but we were unable to access distributors. We presume that was due to an exclusive dealing arrangement. Obviously, we don’t know the details of it, but we achieved one, two percent penetration on that product in a launch. You had a superior, lower-priced product that was just not getting that share of voice out there.”

Vranian also noted that Novartis did not itself make exclusive-dealing arrangements. Novartis Animal Health since has been acquired by Eli Lilly and Co. Lilly’s animal health division Elanco also does not employ blocking agreements, according to a company statement provided by spokeswoman Christina Diane Gaines: “Elanco believes competition drives innovation in the industry, which results in greater customer benefit. Our product strategy is focused on investing in innovation over restrictive contracts.”

Gaines said the product described by Vranian is Parastar Plus, a variation of Frontline, the spot-on flea-and-tick preventive made by Merial. “Parastar remains on the market but is not carried through distributors,” she said.

Multiple sources in the distribution sector identified Merial as employing blocking agreements like Zoetis’s. The effects of restricting distributor sales of generic parasiticides are not directly comparable, however, because parasiticides are sold widely outside of veterinary clinics. Moreover, many parasiticides, including fipronil, are classified as pesticides rather than drugs and do not require a prescription to purchase.

Merial did not comment for this article.

Generics dominate Rx market for people

When a person takes a prescription drug, chances are good that it’s a generic. “If you look at the entire U.S. pharmaceutical market on a script basis, approximately 80 percent of that volume is generic,” said John Kreger, an equity research analyst specializing in health care at the financial services firm William Blair & Co.

By revenue, generics account for only about 20 percent of the drug market, Kreger noted, illustrating the steep price difference between generic and brand-name medications.

The generic drug realm is vastly smaller on the veterinary side. No official figures exist, but Kreger estimates prescriptions for generics make up less than 20 percent of the market. “On a dollar basis, it is probably more like 10 percent,” he said.

Kreger anticipates that the market will expand because, he said, generic drugs tend to be lucrative for more players at the same time that they save consumers money.

“When the product goes generic, you have at least two manufacturers effectively competing to make the same thing,” he explained, referring to the brand and the generic. “They’ll give up (profit) margins, so there is more margin to be created for distributors, the veterinarians and the consumers in the form of a lower price.”

Kreger added, “Obviously, it’s bad for (brand) manufacturers, but everyone else does better when business flips from brand to generic.”

Earlier this year, Kreger watched with interest the acquisition of MWI Veterinary Supply by AmerisourceBergen Co., one of the nation’s largest drug wholesalers with a substantial business in generics.

In a Jan. 12 conference call with the companies, Kreger asked MWI CEO Jim Cleary, “Will this prompt you to go after generics within the companion animal market more aggressively?”

Cleary answered, “The vast majority of our business has been and will continue to be branded products.” He added later, “We don’t have third-party co-pay or insurance. As a result of that, there aren’t the same pressures driving veterinary practices to switch from a branded product to a generic. That’s the key reason our volumes are really weighted to the branded products.”

Are exclusivity deals legal?

Critics of exclusive dealing agreements between manufacturers and distributors contend they’re unlawful, but the FTC takes a nuanced stance. An information sheet it's posted on the subject says such contracts between manufacturers and retailers “are common and generally lawful.”

However, the FTC says, there are instances when exclusivity agreements violate antitrust law, such as when “a manufacturer with market power … potentially uses[s] these types of vertical arrangements to prevent smaller competitors from succeeding in the marketplace.”

In 2012, the FTC accused Idexx Laboratories, the largest supplier of diagnostic testing products used by small animal veterinarians, of maintaining a monopoly through exclusive contracts with its U.S. distributors. In a settlement, Idexx agreed to stop using exclusive distribution agreements with its national distributors, namely, Schein (then known as Butler), MWI and Patterson (then known as Webster).

Idexx subsequently stopped using distributors at all, opting to sell direct to customers as of 2015.

While exclusivity contracts may lock up national distributors, they open opportunities for regional distributors, which can distinguish themselves from the big players by carrying generics.

At Miller Veterinary Supply in Fort Worth, Texas, generics have proven to be a lifeline, said Jack L. Smith, sales manager and grandson of the company founder. “We don’t have the branded products available to us,” Smith said. “We’re really kind of too small for the major companies to be concerned about. … If it weren’t for all the generics out there, our lives would be much harder.”

Therefore, contracts that prevent the national distributors from carrying generics actually keep the smaller players alive. Were the contracts to disappear, Smith said, “That would certainly help the big distributors get a lot of the business that we have.”

Veterinarians have mixed perspectives on the effects of exclusivity agreements on their practices. Dr. Rich Selkowitz, a solo practitioner in New York state, said he uses a regional distributor for generic drugs and a national distributor for everything else. While it may be irritating not to be able to get everything from a single source, he said, “It’s not that big a deal.”

Rich Morris, CEO of The Veterinary Cooperative, a purchasing group for veterinarians, said the problem is that veterinarians may be unaware of the availability of a given generic drug that’s blocked — particularly because generics aren’t blocked uniformly.

“It would be incorrect to say that major distributors don’t carry generic products. They do,” Morris said. “If you’re one of my members, or a clinic out there, you’d say, ‘What do you mean, the majors don’t carry generics?’ Yes, they carry them, but there are certain generics they’re blocked from carrying, and that causes great confusion.”

One way to counter the confusion is simply to make veterinarians aware of the situation, Morris added. “If everybody knew, everybody would have two distributors and the blocking agreements would be much less effective.”

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