A poster on the wall inside the Portland offices of Vets First Choice shows a head-on photo of an elephant and the words: “endangered but not extinct.”
While the reference is to the several endangered species of elephants, it could just as easily refer to the veterinarians that Vets First Choice counts among its clients, according to CEO Ben Shaw.
VETS FIRST choice
WHERE: 7 Custom House St., Portland
CEO: Ben Shaw
FOUNDED: 2010
2014 REVENUE: More than $45 million
2013 REVENUE: $18.7 million
INVESTMENT RAISED IN LAST THREE YEARS: $62.8 million
NUMBER OF TIMES ON INC.’S 5,000 FASTEST-GROWING PRIVATE COMPANIES LIST: Three
The threat comes from the loss of revenue from the sale of pet medications. Americans purchase about $7 billion worth of over-the-counter and prescription medications for their pets each year. Traditionally, pet owners bought those meds from their veterinarians, a service that provided anywhere from 25 percent to 35 percent of a vet’s revenue.
But that business model has been turned on its head with online retailers like PetMed Express, which, like Amazon, can offer lower prices than bricks-and-mortar operations, have begun siphoning those revenues away by offering a broader range of products at lower prices.
Veterinarians “are really in danger of losing their pharmacies,” Shaw said. “If that goes away, it’s unclear how the veterinarian profession survives.”
Helping veterinarians rethink their business model is where Vets First Choice comes in, said Shaw, a Cape Elizabeth resident. The five-year-old company offers outsourced online pharmacy services to veterinarians, which allow the vet to retain local customers while competing on price with online suppliers. From a pet owner’s point of view, the online store appears to be operated by their local vet, but it’s actually Vets First Choice that’s filling and shipping the orders from its massive pharmacy in Omaha, Nebraska, where it employs six pharmacists and twice as many pharmacy technicians and stocks more than 6,000 medications.
The company has grown rapidly since its founding in 2010, posting revenue “north of $45 million” in 2014, according to Shaw. That represents at least a 141 percent increase from the $18.7 million in revenue it reported in 2013. The company’s growth has landed it on Inc. magazine’s list of the 5,000 fastest-growing privately owned companies in the country for three years running. The company currently employs 160 people, about a third of which are based in Portland.
Investors have taken notice. Vets First Choice recently announced a new $52.3 million investment round led by New York-based private equity firm Clayton, Dubilier & Rice. That, coupled with two previous rounds raised in 2012 and 2013, means the company has raised $62.8 million in the past three years. Among its investors are Thomas Ryan, former CEO of CVS/Caremark Corp.; Bill End, a former L.L.Bean executive who was also president and CEO of Land’s End; and David Mahoney, former co-CEO of McKesson Corp., one of the largest health care product distributors in the world.
“There’s a lot of capital available to companies like Vets First Choice right now,” Shaw said. “There’s a vast amount of capital looking for compelling new technologies and scalable stories.”
The initial investment rounds allowed Vets First Choice to build out its platform, demonstrate the market potential and start attracting the notice of veterinarian practices throughout the country. The new $52.3 million investment, which came from 33 different investors, will send the company into overdrive, allowing it add more complex products and services that move the company beyond just filling prescriptions and into areas of prescription management and data analytics to help vets better manage their practices and increase pet health. The new investment will also allow the company to hire 60 new employees by the end of the year.
Shaw declined to share the amount of equity an investment buys in his company, but said “it’s a really fair value that reflects the peer group of publicly traded, technology-enabled health care companies.”
The company has a lot going for it, according to Ravi Sachdev, the partner at CD&R who led the firm’s investment in Vets First Choice.
“The demands on veterinarians are growing every day,” said Sachdev, who now sits on Vets First Choice’s board. “And so if you can find ways to create scale efficiencies for them, help them utilize technology better to both deliver a higher level of customer service and lower prices to their pet owners, create a better experience for their pet-owner customers, I think there’s a tremendous amount of opportunity there.”
Sachdev, who until recently led J.P. Morgan’s health care practice and was involved in some of the health care industry’s largest mergers, acquisitions and IPOs, was attracted to Vets First Choice because it’s a “first mover” in the veterinarian space. While the human-centric health care business is already leveraging technology-enabled services like electronic medical records, the veterinarian business is still primarily paper-based, Sachdev said.
“We are in the absolute early innings of it in the pet business. That’s why it’s so interesting to me,” said Sachdev. “This is a universe that has never been defined by any forms of data.”
ONLINE COMPETITION
John Talmadge is one of those veterinarians who watched the revenue from the pharmacy portion of his business shrink as online competitors got into the game.
In the face of this competition, a veterinarian could either throw up his hands and walk away from a quarter of his revenue, Talmadge said, or he can try to leverage technology to better compete. Talmadge, who operates a two-clinic practice in southwest Ohio, chose the latter option.
“The Internet is the great equalizer,” he said.
But Talmadge runs a veterinarian practice, not a technology company. He looked for partners, trying three other online pharmacy providers before partnering with Portland-based Vets First Choice in April 2014.
“If you can leverage (the Internet), you can potentially reduce costs. It’s just that as a profession we don’t necessarily know how to do that, we don’t have the expertise,” Talmadge said. “Honestly, that’s what Vets First Choice is bringing to the profession. They’re bringing an online model that reduces our costs. We don’t have to touch that inventory. It’s ‘virtual’ inventory.”
But the virtual-inventory business model took some getting used to. For example, the model requires a vet office to cannibalize its existing in-house retail pharmaceutical sales by directing its customers to its online store, where the drugs will be 20 percent to 50 percent cheaper than if a pet owner bought the meds at the vet’s practice, Talmadge said. Not only will the vet bring in less revenue on each sale, but it’ll also have to share some of that revenue with Vets First Choice.
But the benefits far outweigh his initial reservations, Talmadge said.
While his practice collects less revenue per sale, the convenience and competitive pricing of his new online store has led more pet owners to buy from him rather than the big online pet pharmacies. Talmadge’s Bigger Road Veterinary Clinic has increased its annual online pharmacy sales from $15,000 in 2012 to $340,000 in 2014.
“So we are actually growing our total pharmacy business after a number of years of it shrinking because we’re convenient, because we’re price competitive and our clients appreciate the fact that we’re trying to help them save money wherever we can,” Talmadge said.
The other benefit to the virtual-inventory model is that Bigger Road no longer needs to maintain a robust inventory of drugs. In 2008, Talmadge’s two clinics had $150,000 worth of drugs sitting on their shelves at any one time. Since moving to the virtual-inventory model, he’s been able to reduce that to $40,000.
“That reduction has improved cash flow for the practice so we can invest the dollars that were tied up in inventory in other projects that help build our business in our service areas,” he said.
Right now Vets First Choice works with more than 12,000 veterinarian practices like Talmadge’s throughout the country, which is nearly half the roughly 25,000 estimated practices, according to Shaw. That collective buying power offers efficiencies and cost savings that allows Vets First Choice and, therefore, its independent veterinarians, to compete on price with the major online pharmacies.
“So what Vets First Choice was able to do is align pet owners, veterinarians and manufacturers in a way that was innovative at the time – and still is – and created some disruption to the traditional, conventional wisdom of having to manage inventory at the practice level,” Shaw said.
Going forward, Vets First Choice wants to continue that disruptive streak as it targets prescription management and compliance, which means the company would not only act as an online retailer, but deliver communication services such as reminding pet owners when they’re due for a refill.
Talmadge said this is “a huge deal” as his employees don’t have the time to track all the medications bought by customers and then call with reminders.
“One of the biggest issues facing not just veterinary medicine, but human medicine, is compliance,” Talmadge said.
Again, by leveraging the power of technology from a communication standpoint, Talmadge said Vets First Choice could provide real value.
“That’s the technology that the small-business owner can never do on their own, but these guys are bringing us a platform that allows us to better communicate with our clients, stay in touch with them, keep them informed, and ultimately resulting in pets living a longer, healthier, happier life because I’m able to better manage the drugs they’re on and stay on top of it.”
FATHER FOUNDED IDEXX
This is not the first time the Shaw name has been associated with disrupting the veterinary industry.
Ben Shaw learned from his father, David Shaw, who in 1983 founded Idexx Laboratories Inc., the Westbrook-based biotech company that now employs 5,500 people across the globe and pulled in roughly $1.5 billion in revenue last year. David Shaw currently serves as chairman of Vets First Choice’s board.
David Shaw stepped away from daily responsibilities at Idexx in 2003, but has remained active in the industry. That same year, the father-and-son team co-founded a private investment firm called Black Point Group, which over the past decade has invested in a dozen human- and pet-health companies. One of those companies was FetchDog, an online and catalog retail business aimed at pet owners, which David Shaw started in 2007 with his wife, the actress Glenn Close. It was within FetchDog that the seed of Vets First Choice was planted.
In 2008, FetchDog spun off a business that was then called Direct Vet Marketing to focus on providing direct marketing services to veterinarians. The remaining FetchDog business was sold to Potpourri Group in 2012.
At the time it was spun off, Direct Vet Marketing was more an idea then a business, Ben Shaw said. It officially launched in 2010 as Vets First Choice with the focus on providing outsourced pharmacy services to veterinarians.
While Idexx has succeeded in revolutionizing the back office diagnostic and lab services part of a veterinarian’s business, Vets First Choice targets the customer-facing pharmacy portion of a veterinarian’s business.
“Vets First Choice played off a lot of experience we had in human health, in veterinary health, in e-commerce and the direct marketing businesses,” Ben Shaw said.
Sachdev, who had a prior relationship with David Shaw before investing in Vets First Choice, said the company’s management team is one of its major competitive advantages.
“You have a unique team with a lot of domain experience and a lot of relationships in the space,” Sachdev said. “For a company that’s trying to disrupt a legacy business model, that’s a big, big advantage.”
Ben Shaw has hired several former Idexx executives, saying when he does, he knows he’s hiring someone who understands what it means to think big, think bold and be a company with a global reach.
“We have a really ambitious goal: to change the future of veterinary pharmacy,” Shaw said. “It’s an ambitious undertaking. It’s going to be hard; it’s very competitive; there’s a lot of technology at work here. And the folks who are coming from Idexx have a frame of reference for what great looks like, what it takes to do something like that – to change the entire landscape of veterinary health.”
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