How the financial landscape for Pet Pharmaceuticals Has Been Changed by the Internet
The latter half of the 1980’s and 90’s marked the beginning of the internet for consumers. Although it was regarded by many businesses as a new invention and a second-rate market, the internet wasn’t an immediate concern. Since the mid 1990’s as growing numbers of people Internet-connected, the possibilities for businesses to connect with consumers directly from their homes began to become evident. Since then, the internet has led to an enormous change in how business is carried out. Businesses began investing resources into internet-related development initiatives. In the beginning, World Wide Web brought companies and investors together in an evolving market.
The .com bubble that erupted in 1997-2000, followed by a crash that occurred shortly afterward. resulted in many Internet-based startups in the midst of being underfunded. The pet product industry brought an example of one of the most infamous failings in during the .com boom, Pets.com. It was initially well-funded and had an advertising fund that could have bought super bowl advertisements The company fell apart due to a weak distribution strategy.
Although it is it is a shadow of Pets.com Another pet-related business emerged from the bubble of the internet and, in the past 15 years, has changed its distribution system of Pet Pharmaceuticals and OTC industry. This paper will analyze the financial and economic impact on Pet Meds Express Inc on the Veterinarian and Pet Pharmaceuticals market and analyze the process the company used to become the most renowned on the internet Pet Pharmacy in the world.
This is The Evolving Pet Meds Industry
In the month of January 2012, the Dr. Doug Mader, former president of the North American Veterinary Conference moderated an argument that was heated among PetMeds Express and the Veterinarian community. The reason for this was the manner in which PetMeds Express generated income, changing the distribution chain of the Veterinarian pharmacy industry. Prior to when PetMeds Express started an online pet pharmacy, veterinarians were in the monopoly in distribution of pet medications. What is the best way for a small business within the Pharmaceutical business make such an significant impact? PetMeds Express understood the potential of the internet before it was even a thing and created a new market.
To understand the impact of the influence PetMeds Express is having on the market for pet pharmaceuticals It is crucial to first know the business they are operating within. Zoetis, Pfizer pharmaceuticals animal health and wellness offshoot, says that the rising worldwide demand for food in the developing markets of animal protein and the higher living standards in the emerging markets has helped the market for animal medicines and vaccines increase to a $22 billion market. In this global market, PetMeds Express participates in a four billion dollar U.S. industry, according to their estimates. Many pharmaceutical manufacturers create and market pet pharmaceuticals and direct to veterinarians.
In a market worth $4 billion online, the internet has enabled an unnamed company to step into the market and alter the distribution process with no support of manufacturing companies. Even though PetMeds Express makes up only 6 percent in the US Animal Pharmaceuticals market, the company has brought to light the potential in this sector, which has attracted competitors and the interest of bib box retailers which could lead to an increase in revenue and profits in the event that PetMeds Express cannot align with manufacturers in the near future.
Animal Pharmaceutical Distribution in the US
The large pharmaceutical corporations have been unwilling to collaborate in conjunction together with PetMeds Express to date PetMeds Express had to negotiate their supply chains in a unique method. Instead of buying directly from manufacturer directly PetMeds express is required to purchase from a “gray market” of distributors. They are believed to be Veterinarians who order huge quantities to supply the company, although PetMeds Express representatives haven’t confirmed their source of supply.
Individual Veterinarian practices which dominate the market have expressed concern that the growing online and the retail “big box” strategy is destroying one of their main sources of profit. Prior to this, Veterinarians’ enjoyed a somewhat non-competitive marketplace. Animal owners would go to the Veterinarian in order to get their pet’s medical care, and, because of convenience, buy medication with the Vet. This practice began to be challenged with the advent in the PetMeds Express model, though Veterinarians have a significant market share of about 67% as per PetMeds Express investor data. It is important to remember that this is an individual figure for Veterinarians and practices that are grouped together. The practices don’t share in the same scale economies that PetMeds Express, nor do they represent the same major competition.
It is worth noting it is interesting to note that Dr. Foster and Smith Inc which is a major rival in the market PetMeds Express Inc, was established in 2003. Its Dr. Foster & Smith brand was also a pioneer entry into the market of online. Although the company’s its stock was at 250 million in 2008, the stock is now estimated to be about $170 million. They’re close in terms of market value of PetMeds Express with distribution via the internet however, they are included with the Veterinarians with a 67 percent market share. If other factors are the same to this private firm and they are able to make up roughly the same +/- 6% of the Veterinarian market, which leaves around 60% of market for traditional Veterinarians.
Presently, PetMeds Express represents a tiny Cap stock that had an estimated market capitalization of $257,212,860 in 2012. In spite of PetMeds Express’ relatively small portion of the market there’s reason for concern within those in the Veterinarian community. When the company went public, the market was estimated at $3 billion. PetMeds reported revenues of $93,994. This which left the company with just 3 percent of market share at the time. Compare that to just 6% of the $4 billion dollars market today and we can see the trends of the online retailer’s market increasing. As with all business, the past performance of a company cannot guarantee future earnings.
PetMeds does not represent only a threat to the Veterinarian retail segment of the pharmaceutical industry. The growth of the company has brought competitors, and now distribution comprises “veterinarians as well as traditional retail stores.” It is the retail sector that is beginning to decrease the margins of PetMeds Express and creates a problem that the company needs to tackle and overcome
To continue to maximize shareholder value, major retailers such as Wal-Mart and Target have also a desire to take a larger portion of the pet medicine segment. Their huge purchasing power creates extremely dangerous to both the Veterinarians as well as the emerging online retail sector within which PetMeds operates. In the years 2011 and 2012 PetMeds Express has started seeing the consequences of a competitive market that has slowed growth, raise the costs of new customers and decrease profits.
Ethics and Risks within the Pet Medicine Industry
The moment PetMeds Express entered the market and began to expand, they relied on customers who appreciated the convenience of buying medicines over the internet and those whose veterinary doctors did not have the prescribed medication. Veterinarians earn about quarter of their earnings by selling prescriptions prescribe and then fill. As the company grew and grew, so did PetMeds Express business model, that led to some ethical dilemmas that the business had to face. Similar to any publicly traded company PetMeds Express had to find a way to improve profits, but how could they boost the sales of prescription drugs and boost profits?
The issue prompted an original concept that allowed consumers to make a call, speak with an Veterinarian via phone, and receive a prescription immediately that was then converted into an order and then sent to the consumer. This was a great method to allow the online retail of prescription drugs business to expand. If customers were able to skip the Veterinarian visit altogether, PetMeds Express could capitalize on pet owners who appreciate convenience, and create an additional income stream with its Veterinarian consultations. However, this approach of selling prescriptions, without having the animal in the clinic did not meet the standards of the Veterinary community. Concerned that the growing online business could cut the revenue stream of Veterinarians through sales of medications, PetMeds Express had crossed an ethical boundary and caught the notice by the Veterinarian community, as well as regulators.
Just three years into operation at the end of 1999 PetMeds Express was disciplined by the Florida Board of Pharmacy for the prescriptions that were given over the phone. The company was fined $30,000.00 fine however, more importantly it caused a stir in those in the Veterinarian community. While the company complied immediately the law, this practice continues to be discussed, even during the 2012 North American Veterinary Conference (NAVC).
In 2012 at the NAVC the petition of Birmingham Alabama Veterinarian Dr. Doralee Donaldson, drew the signatures of 149 people and ended being a success, with PetMeds Express withdrawing as a participant in the NAVC. Instead, representatives from PetMeds Express showed up to the NAVC and participated in an open panel discussion, hoping to redress the ill-feelings of members of the Veterinarian community. Going forward, PetMeds express intends to collaborate together with Veterinary community to encourage regular visits to Veterinarians and trying to demonstrate to Veterinarians that there is a place within the industry for the two of their interests.
Financial Analysis
PetMeds is the very first commercialized non-veterinarian owned pet pharmaceuticals company online and first publicly traded company in the sector. Since the advent of new competition in the online market and the retail sector was introduced, revenues started to decline. In analyzing the data in the annual reports of the company we can observe how PetMeds Express has experienced a drop in revenues total from 2010. Profit Margins increased to 10.5 percent during the time from 2008 until 2010however 2011, and 2012 experienced year over decreases in revenue, with a margins of lower than 7 percent in 2012.
If we examine the online enterprise in a different way it is possible to see how the business is making the most of the potential of its employees. As per Lowell L. Bryan of McKinsey Quarterly, an excellent measure of an internet-based business’s performance is the amount of profit per employee. Alongside measuring the the returns on capital invested This also measures the contribution that team members make. Bryan claims that “from 1995 until 2005, the 30 biggest businesses around the globe (ranked according to the market cap) saw their profits per employee grow to $83,000 from just $35,000.”
Applying this technique to analyse the annual profits to the number of employees, based on PetMeds Express annual reports, we can see that they posted their best year in 2010, with an average profit per employee of $114,546. The stock has been down in the past couple of years, and the profits per employee. In 2012, the profit/employee dropped to $80,478. This is not bad for a small-cap business.
The decrease of profits can be attributed to a variety of reasons, such as the weak economic situation, which is forcing pet owners to become more conscious of their expenses, the more entry to the marketplace by retailers online such as Amazon.com as well as increasing competition from major retail chains such as Wal-Mart, Target Wal-Greens, and Wal-Mart. It means PetMeds Express must advertise more and cut their prices in order to remain at a competitive level, thus reducing profits for the near term, until new strategies, like more advertising, can help the company to grow.
If we look at the graph to the right one, we can examine the way PetMeds Express has performed against the market. The graph illustrates how $100 invested in 2007 would do when placed in PetMeds Express vs. the S&P 500, Russell 2000 and Nasdaq Composite Indexes. From 2008 until the end of 2010, their stock had significant growth and performed very well against the market, and the $100 investment was $187.09. The situation changed in 2011, when PETS faced increased competition, and a lower profits and pricing. If we take a look at the trends in 2009, PETS saw the benefit of a 48.5 percent increase, then in 2010, an increase of 35. The year 2011 saw an 28.5 percentage loss and 21.9 percentage loss in 2012, which put the stock back on with other indexes, but declining.
Ratio Analysis
PetMeds Express has grown quickly and has carved out a niche online-based distribution platform for pets. OTC and prescription medications. If we examine the firm’s solvency, liquidity, and profitability, using ratio analysis we can identify the reasons for concern in the financial aspect, besides of the declining profits. It is possible to gain a greater comprehension of the situation by studying the ratios for the company’s financials that are based on the 4 quarters ended on March 31, 2013.
Liquidity
The company currently has a percentage that is 8.03 which is a high ratio. The company is in a great position should they are required to buy comparable competitors. This is because of the high amount of inventory that the business has, which is apparent when you subtract the inventory from the percentage of 5.81. Its Net Working Capital stands at $59,162, meaning there isn’t a chance of the business having to run out of cash.
Utilization of Assets:
The twelve month ratio of inventory turnover is at 5.83. If we compare it to the biggest Pet Retail store PetsMart the 2012 ratio of their inventory turnover was 7. If we compare it to Human pharmacies, the norm is 12. However, even though PetMeds Express is below this and has a more overhead and a higher inventory holding cost. The lower ratio could be result from inefficiencies within the market gray area PetMeds Express must purchase through.
Profitability:
The ratio of return on assets is.19 and the ratio of return on equity is.21 This means that although the profit margin in 2012 was.07 They are making good profits for shareholders. In addition the profit margin has increased to from.07 to.09 in the initial period of 2013. possibly an indication that the business is looking for ways to reduce their expenses, or that the increased marketing efforts as a result of increased competition is already working. If we continue to monitor this figure, we’ll be able to see the possibilities to allow PetMeds Express to remain competitive.
Debt Indicators:
The debt-to-equity ratio of.11 and the ratio of debt to equity of.12 indicates how PetMeds Express may not be making the most of their leverage. Because they’ve had some rough times with declining profits They should think about investing in other businesses that can increase their leverage.
PetMeds Express has also experienced an annual drop in earnings per share in the years 2011 and 2012. EPS of 1.14 in 2009 before beginning to fall to.92 in the year 2011 and.78 for 2012. The PE Ratio for 2012 was 14, and is currently in the range of 15.14 In light of this,, the price investors would be willing to pay is around 18 for 2012.
By using the PE ratio for 2012 and analyzing PetMeds competitors in the pharmacy and pet business, we arrive at an average ratio of P/E of 19.5. With this ratio, we could multiply the industry average by PetMeds’ earnings of.82 which gives us about $16 for each share of intrinsic value. It appears that Pet Meds stock could be somewhat undervalued at present.
Future Potential
PetMeds Express must do something to bridge the gap between their previous and current performance. The extra advertising that the company has been implementing within the last two years has helped the company recover. What are alternatives the company might be able to pursue?
Because PetMeds Express depends on the gray market for distribution, they are at an increased risk should large-box stores use their buying power and connections to get an edge. PetMeds Express could manage to obtain wholesale agreements directly from pharmaceutical companies, which would reduce their costs. However , this kind of distribution will likely be open to competitors in the event that they were to open it up.
The company is financially stable and faces an extremely competitive market. It is possible that they might think about a partnership with their competitors. One obvious option is that with one of larger retailers such as PetsMart. Both Pet retailers are competing with Wal-Mart and other large retailers. The partnership may open up the possibility of a new revenue stream for each business and could also allow them to share the purchasing power of both companies. While cannibalization could occur with other items plays part in the possible advantages of providing PetMeds pharmaceuticals at the renowned and expanding retailer’s storefront. While PetsMart offers its own online store but they don’t carry medicines. Perhaps the brand that is well-established PetMeds Express would be able to carry the medications that these businesses currently do not sell.
Maybe looking at one of the top players in the world of pharmaceuticals such as Pfizer could provide us with an insight into the future of this market. Pfizer recently changed their brand name for the Animal Health division into Zoetis and it is clear that Pfizer recognizes the potential of this area enough to develop a name it in a specific way. With some wise business choices that focus on forming alliances, particularly with manufacture of drugs, PetMeds Express can continue to establish itself as an online powerhouse to reckon with in the animal health business.
Conclusion
The company has come through some bumpy beginnings, with a number of legal disputes. They escaped the internet.com bubble and became the biggest Animal Pharmacy with 6% of the market. When looking at the financials, it is evident that the company is well-off. This could be one of reasons why Zack’s average brokerage rating for this stock is a “hold.
When we look at the company’s past and the current performance of its stock, we see an innovative company that has grown in technology, but is required to remain agile and flexible to changes as the competition gains momentum. PetMeds Express has gained 6 percent market share within the US Pet Pharmaceuticals industry since the company’s inception in. This has led to competition for its distribution network. The competitors include other retailers on the internet as well as large discount chains across the nation which are reducing prices and are reducing profits. In all, since PetMeds Express was a pioneer in the model of a nationalized pet pharmacy in the fast-moving internet age, they have played a major role in Veterinarian’s loss of 33% of the market, and also in altering the distribution model within the sector in just 17 years.