The 1980’s and the early 90’s marked the beginning of the internet for consumers. Although it was regarded by many businesses as a new invention as a secondary market the internet was never an issue of major importance. In the late 1990’s, as growing numbers of people Internet-connected, the possibility for businesses to connect with consumers directly from their homes began to become evident. Since then, the internet has led to significant changes in the way business operations are carried out. Companies started 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 developed between 1997 and 2000, followed by a crash that occurred shortly afterward. resulted in many Internet-based startups that were at the time financially unsupported. The pet product industry brought its customers one of biggest mistakes of during the .com market, Pets.com. It was initially well-funded and had an advertising fund that paid for super bowl advertisements The company fell apart due to a weak distribution strategy.
While being it is a shadow of Pets.com Another pet-related company was born out of the Internet bubble and, in the past 15 years has had a significant impact on how distribution is conducted in the Pet Pharmaceuticals and OTC industry. This article will examine the financial and economic impact that Pet Meds Express Inc on the Veterinarian and Pet Pharmaceuticals market and analyze the route the company took to become the biggest on the internet Pet Pharmacy in the world.
This is The Evolving Pet Meds Industry
In the month of January 2012, in January of 2012, Dr. Doug Mader, former president of the North American Veterinary Conference moderated an intense debate among PetMeds Express and the Veterinarian community. The debate was triggered by the manner in which PetMeds Express generated income, changing the distribution chain of the Veterinarian Pharmacy business. Prior to when PetMeds Express started an online pet pharmacy, veterinarians had an almost exclusive position in the distribution of pet medication. How can a small business within the Pharmaceutical business make such an significant impact? PetMeds Express understood the potential of the internet in the early days 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 which they operate in. Zoetis, Pfizer pharmaceuticals animal health products offshoot, believes that the rising demand for food in new markets that are dominated by animal protein as well as the rising quality of life in these markets have helped to make the market for animal medicines and vaccines expand to the current $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 They sell directly to veterinarians.
In a market worth $4 billion online, the internet has enabled an unnamed company to step to the scene and transform the distribution model with out the help of the manufacturers. Even though PetMeds Express makes up only 6 percent of US Animal Pharmaceuticals market, the company has brought to light the potential in this segment, attracting rivals and the interest of bib box retailers and could result in an increase in revenue and profits when PetMeds Express cannot align with manufacturers in the near term.
Animal Pharmaceutical Distribution in the US
The big pharmaceutical firms have not agreed to cooperate in conjunction together with PetMeds Express to date PetMeds Express had to negotiate their supply chains in an innovative method. Instead of buying directly from the manufacturers themselves, PetMeds Express has instead been ordered to purchase its supplies from a “gray market” of distributors. They are believed to be Veterinarians who purchase large quantities for 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 big box retail method is taking away one of their main sources of profit. Prior to this, Veterinarians’ enjoyed a fairly non-competitive market. Animal owners would go to an Veterinarian for a visit, and because of convenience, purchase medications directly with the Vet. This practice was affected by the rise in the PetMeds Express model, though Veterinarians have a significant market share of about 67%, according to 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 like PetMeds Express, nor do them individually represent the major competitors.
It is fascinating to know it is interesting to note that Dr. Foster and Smith Inc is a major competitor in the market PetMeds Express Inc, was established in 2003. Dr. Foster and Smith was founded in 2003. Dr. Foster & Smith brand was also a pioneer introduction to the online market. Although the company’s valued at 250 million in 2008, the stock is now estimated to be approximately $170 million. They’re similar in terms of market value of PetMeds Express with distribution via the internet but they are included with the Veterinarians with a 67 percent market share. If all other variables are comparable to this private firm and they are able to make up roughly the same to 6% Veterinarian market, which leaves around 60 percent of market for traditional Veterinarians.
At present, PetMeds Express represents a tiny Cap stock that had the market cap of $257,212860 in 2012. However, despite PetMeds Express’ relatively small portion of the market there’s reason for concern in those in the Veterinarian community. When the company went public, the market was estimated to be $3 billion. PetMeds reported revenues of $93,994. This which left the company with just 3 percent in the marketplace at the time. Compare that figure with only 6% of the $4Billion dollar market currently and we can see the trends of the online retailer’s market expanding. As with all company, past performance cannot guarantee future earnings.
PetMeds doesn’t represent the sole threat for the Veterinarian retail pharmacy segment. The growth of the company has brought competitors, and now distribution comprises “veterinarians and online 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 address
In order to keep maximizing shareholder value, major retailers such as Wal-Mart and Target have also a desire to take a larger share of the pet medical segment. Their huge purchasing power creates an enormous threat to the Veterinarians as well as the emerging online retail sector that PetMeds operates. In the years 2011 and 2012 PetMeds Express has started seeing the consequences of a competitive market slow growth, raise the cost of new customers , and lower profits.
Ethics and Risks within the Pet Medicine Industry
In the early days when PetMeds Express entered the market and began to expand, they relied on the convenience of buying prescription medications over the internet, as well as the patients whose doctors didn’t carry the various prescription medications. Veterinarians, however, earn around quarter of their income through the sales of prescriptions are written and filled. As the business grew as did the PetMeds Express business model, that led to some ethical issues that the company was confronted with. Like any publicly traded company PetMeds Express had to determine how they could boost profits, but how can they boost the sales of prescription drugs and, consequently, boost profits?
The issue prompted an original concept that allowed consumers to contact and speak with an Veterinarian via phone, and receive a prescription immediately that was then converted into an order, and then delivered to the consumer. This was a great opportunity to allow the online retail of prescription drugs business to expand. If consumers could avoid the Veterinarian visit altogether, PetMeds Express could capitalize on pet owners who appreciate convenience, and create an additional revenue stream from its Veterinarian consultations. But, the method of selling prescriptions and not having the animal in the clinic did not make sense to the Veterinary community. Concerned that the growing online business might eat into the vet’s income stream from sales of medication, PetMeds Express had crossed an ethical boundary that attracted the notice by the Veterinarian community and regulators.
Just three years into operation In 1999 PetMeds Express was disciplined by the Florida Board of Pharmacy for the prescriptions over the phone. The company was fined $30,000.00 fine however, more importantly was the fact that they roiled those in the Veterinarian community. While the company complied immediately with the fine, the practice has continued to be discussed, even in the 2012 North American Veterinary Conference (NAVC).
In 2012 at the NAVC the petition of Birmingham AL Veterinarian Dr. Doralee Donaldson, drew the signatures of 149 people and ended having PetMeds Express withdrawing as a participant in the NAVC. Instead, representatives from PetMeds Express showed up to the NAVC and participated in an interactive panel discussion in order to alleviate the negative feelings of members of the Veterinarian community. In the future, PetMeds express intends to cooperate 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.
PetMeds has been the first commercialized non-veterinarian owned pet pharmaceuticals company online and first publicly traded company in this market. As competition increased on the internet as well as retail sector was introduced, revenues were slowing down. In analyzing the data in the annual reports of the company, we can observe how PetMeds Express has experienced a decrease in its total revenue from 2010. Profit Margins increased to 10.5 percent during the time between 2008 and 2010however 2011, and 2012 experienced year over years declines. The margin of under 7% in 2012.
If we examine the online enterprise in a different way we can determine if they are maximizing the potential of its employees. As per Lowell L. Bryan of McKinsey Quarterly, an excellent way to gauge an online-based company’s performance is the amount of profit per employee. Apart from measuring the returns on capital invested it also shows the contributions that team members make. Bryan states that “from 1995 until 2005, the 30 most powerful businesses worldwide (ranked according to the market cap) are seeing their earnings per employee grow to $83,000 from just $35,000.”
Utilizing this method to study the annual profit to the number of employees, based on PetMeds Express annual reports, we can see that they had their highest year in 2010, with an average profit per employee of $114,546. The stock has been down in the past couple of years, as has the profit per employee. In 2012, the profit/employee dropped to $80,478. This is not bad for a small-cap company.
The decline of profits can be attributed in part to various reasons, such as the weak economy, which has caused pet owners to become more conscious of their expenses, the increasing entry in the pet market from other retailers online such as Amazon.com and increasing competition from major retailers like Wal-Mart Target Wal-Greens, and Wal-Mart. That means PetMeds Express must advertise more and reduce their prices in order to remain at a competitive level, thus reducing profits for the near term, until alternative strategies, such as an increase in advertising, aid in helping the business grow.
When we examine the graph on the right one, we can observe 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, with the $100 investment averaging $187.09. The situation changed in 2011, when PETS was faced with increased competition, and a lower profits and pricing. When we examine the trends in 2009, PETS had the benefit of a 48.5 percent increase, then in 2010, an increase of 35. The year 2011 saw an 28.5 percent loss, and a 21.9 percent loss in 2012. This put the stock back on with other indexes, but declining.
PetMeds Express has grown quickly and established itself as an web-based distribution service for pets. OTC and prescription medications. When we look at the company’s solvencyand liquidity as well as profitability through ratio analysis, we can determine whether there are any reasons for concern in the financial aspect, besides of the declining profits. It is possible to get a better comprehension of the situation by studying the ratios for the company’s financials which are based on the four quarters that ended March 31, 2013.
The company currently has a percentage in the range of 8.03 which is extremely high. This puts the company in a great position should they are required to buy similar competitors. This figure is due to the huge amount of inventory that the business has. This can be observed when you subtract the inventory from the percentage of 5.81. In addition, the Net Working Capital amount is $59162, meaning there is no possibility of the company ever 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. When compared to Human pharmacies, the norm is 12. Although PetMeds Express is below this however, they have a more overhead and a higher inventory holding cost. The lower ratio could be result from inefficiencies in this gray market that PetMeds Express must purchase through.
The ratio of return on assets is.19 and the ratio of return on equity is.21 So, although the profit margin in 2012 was.07 However, they’re making good profits for shareholders. Additionally the profit margin grew to from.07 to.09 in the first period of 2013. which could be an indication that the company is looking for ways to reduce their expenses, or that the increased marketing efforts due to increased competition is already working. As we keep an eye on this figure, we’ll be able to see the possibilities of PetMeds Express to remain competitive.
The debt to equity ratio of.11 and the ratio of equity to debt of.12 suggests the fact that PetMeds Express may not be completely utilizing their leverage. Because they’ve had some rough times with declining profits They should think about investing in other businesses that can help them improve their position.
PetMeds Express has also experienced decreases in earnings in both 2011 , and in 2012. EPS were 1.14 in 2009 before beginning to fall to.92 in 2011, and.78 during 2012. The PE Ratio for 2012 was 14, and is currently set in the range of 15.14 According to this, the price investors would be willing to pay is around 18 for 2012.
Utilizing the PE ratio of 2012 and looking at some of PetMeds market competitors currently in the pharmacy and pet business, we can calculate an average ratio of P/E of 19.5. Based on this figure, we can 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 overvalued right now.
PetMeds Express must do something to make a difference between their previous and current performance. The additional marketing the company began over the past two years has helped to recover. What are alternatives that the company could be able to pursue?
Because PetMeds Express depends on the gray market to distribute their products, they face an increased risk should large-box stores use their purchasing power and connections in order to benefit. PetMeds Express could manage to reach wholesale agreements directly with the pharmaceutical companies, thus reducing their costs. But this sort of distribution could be accessible to their rivals in the event that they were to open it up.
The company is financially stable and faces the challenge of a highly competitive market. Maybe they should think about a partnership with their competitors. One obvious option is in conjunction with one of the 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 also share the purchasing power of both companies. Although cannibalization of other items plays part in the possible benefits of providing PetMeds pharmaceuticals at the renowned and expanding retailer’s storefront. While PetsMart offers its own online retailer but they don’t carry medicines. Maybe the well-known brand PetMeds Express would be able to carry the medications that the companies currently don’t have.
Perhaps looking at one of the top players in the world of pharmaceuticals like Pfizer could provide us with an idea of the future possibilities of the market. Pfizer recently changed their brand name for the Animal Health division into Zoetis which indicates 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 partnerships, specifically with manufacture of drugs, PetMeds Express can continue to establish itself as an online powerhouse to reckon with in the animal health business.
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. In analyzing the company’s financials, it is evident that the company is in good health. This could be one of reasons why Zack’s average brokerage rating for this stock is a “hold.
In examining the company’s history and its current stock performance, we see an innovative company that has grown with the advancement of technology, but is required to remain flexible and be able to adapt as the competition gains momentum. PetMeds Express has gained 6 percent market share in the US Pet Pharmaceuticals industry since it was founded in. This has led to competition for its distribution network. The competitors include other retailers on the internet as well as large discount stores across the country 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 era, they’ve had a significant impact on the loss of 33% of veterinarians in the market, and also in changing the distribution model in the industry over the span of 17 years.