The weird world of pet meds
A deep dive into the veterinary drug channel
This newsletter is about human health, and I’ll return to that topic in subsequent posts. But I’m a little obsessed with how drugs flow through the system, how payments happen, and which companies have control of the market. I’m also the first port of call for friends wondering how a particular drug channel works. So when I got this text, I had to figure it out.
Small animals, large animals
First, unlike humans, which are just one species, veterinarians (and the drugs they have in their arsenal) have to cover a multitude of species. Generally speaking, small animal vets handle dogs, cats, and small rodents. Large animal, or livestock vets, typically handle horses, cows, sheep, and other animals in that category. (In case your brain runs on the same tracks as mine: there’s no such thing as an insect veterinarian, but there are insect pathologists.)
I’m focused on small animal vets in this article, because while the livestock drugs are truly fascinating, the market is much different. (Among other differences, a selection of important livestock antibiotics were simply available over-the-counter, until June 2023.)
At first glance, I expected animal drugs to be a simpler market than human drugs—after all, animal drugs aren’t typically covered through insurance or distributed through PBMs. For that matter, most medications (roughly 80%1) are purchased directly from a vet.
I was about to counsel my friend to start building an empire of cost-plus animal drugs—how could the market be so old-fashioned? No insurance and purchasing from the prescriber? Sounds like room for disruption! Well, it’s not that simple.
Small animal vets and their corner on the market
There are about 55,000 veterinarians working in 25,000 vet clinics treating companion animals across the U.S. Companion animal veterinary medicine is a $29 billion (as of 2021) market. The prescriptions they write mostly fall into one of the four main categories of companion pet drugs: parasiticides, vaccines, anti-infectives (antibiotics), and anti-inflammatories.2
86% of FDA-approved animal drugs don’t have a generic version, and the major manufacturers have no incentive to develop generics. (However, some animal drugs are actually human drugs in different dosages—in this case, the medications tend to be generic.3)
Without insurance formularies to prioritize a generic over a brand-name, and with almost all animal drugs flowing through a vet point of contact (rather than a pharmacist that can do substitutions), the market for animal generics is constrained.4 But this isn’t the crazy part yet.
Diversion!
The crazy part is that most of these drugs are only available through a vet clinic because the major manufacturers and vet clinics have intentionally set it up that way. Most, if not all, manufacturers have exclusive distribution and anti-diversion agreements with certified veterinary clinics.
As an illustrative example for how serious these manufacturers are: in 2009, a representative from Merial, one of the major veterinary drug manufacturers,5 visited a vet named Dr. Dawn Moore Fradkin. The rep offered to exchange her supply of Vectra 3D, a flea and tick treatment manufactured by a competitor, for Merial’s Frontline treatment.
Dr. Fradkin agreed; as she told VIN News Service (an industry publication with an active forum for vet commenters), Vectra 3D wasn’t selling, and she expected the manufacturer to charge her a 15% restocking fee to return the product herself, so it was a good deal. That is, until Summit VetPharm, the manufacturer of Vectra, accused her of violating their anti-diversion agreement.
“The anti-diversion agreement is pretty clear,” Joseph Conti, the company’s Senior Director of Regulatory & Development, told the VIN News Service. “The anti-diversion agreement says they will only sell it to a vet-client-patient relationship. Obviously, the Merial rep is not a vet-client-patient relationship. Our fear is that when that happens, there’s nothing to stop the Merial rep from selling it on eBay or into the trade.”
(I really recommend reading the whole article, it’s got drama, humor, niche industry beef, really all you could ask for from a story.)
Why are the manufacturers so sensitive to their drug being disbursed outside the vet-client relationship? Diversion or non-exclusive distribution could result in product ending up in the hands of a major retailer, like Chewy or PedMeds, outside the control of the manufacturer-vet drug channel.
These manufacturers take diversion so seriously that Summit employed a tracing technology, called Bloodhound, in every package of its Vectra medications.
When Summit was acquired in 2010 by CEVA, a French animal health company, the COO of CEVA confirmed its commitment to including Bloodhound technology in every package, in a press release seemingly meant to reassure vet offices. (Meanwhile, Merial, the competing company, complained to VIN News Service that Summit only got away legally with using tracing technology because of its comparatively small market share.)
So to recap: the reason that vet drugs aren’t available online or through major retail pharmacies is because the manufacturers have tightly controlled the distribution channel, down to harassing individual vets who step out of line.
The reason that vet drugs aren’t available online or through major retail pharmacies is because the manufacturers have tightly controlled the distribution channel, down to harassing individual vets who step out of line.
“Useless, lying letter”
Both manufacturers and vets, as a group, take this concept extremely seriously. They argue that these strict measures are the only way to ensure quality and proper prescribing (more on this later). These drugs also comprise approximately 20-25% of vet clinics’ revenue, and they argue that selling drugs allows them to keep their clinic prices lower as a result.
And the industry is small enough that even the appearance of stepping out of line can cause an uproar.
Case in point: in 2010, Bayer began selling its flea and tick preventative, Advantage and K9 Advantix, through major retailers (gasp!). In response, Merial, the makers of Frontline, sent a letter to all vets who stock Frontline, marked “extremely urgent.” In this letter, Merial recommitted to never selling outside the traditional distribution channels. Merial felt compelled to write this letter because its product was frequently showing up in retail channels.
But the letter was met by “a fresh volley of sneers” from vets! Some comments, republished by VIN News Service:
“Today, I got an ‘extremely urgent’ letter from Merial saying Frontline is not ‘going OTC,’ ” wrote Dr. William Aufderheide of Imperial Beach, Calif. “I've seen it at both Costco and Petco. What are they talking about? I’m sure they know where these products are turning up.”
Dr. Jennifer Bouthilet of Maplewood, Minn., chimed in: “I got the letter today, too. They must have spent a lot of money to send a useless, lying letter to everyone by FedEx, marked ‘extremely urgent.’ It went directly into the shredder. I ... don’t really care if they let it be OTC. Just don’t keep trying to tell us it’s not.”
Dr. Nicki Kominek of Auburn, Calif., suggested the issue puts the company’s reputation at risk. “It makes me distrust the entire company, which is a shame since I have been a huge fan of their vaccines and Previcox (canine osteoarthritis pain medication),” she wrote.
An industry is entirely self-regulating, arguably to the detriment of consumers. Given all of this, you might ask, why hasn’t the FTC investigated? Well, they have.
FTC investigation
In 2015, the FTC released a 115-page staff report reviewing the companion pet drug market. They asked for comment from industry stakeholders and consumers…and the comments land about where you’d expect them to. According to vets and manufacturers, the system works. Consumers can access appropriate medication from the appropriate prescriber and be assured of that medication’s quality. But according to consumers (and retailers), the system is constrained and broken. They can only get brand-name medication at heavy mark-ups, there is no competition, and there are hardly any generic alternatives.
In its analysis of the situation, the FTC states that a more open prescription system could drive down prices:
As pet medications have become more widely available through alternative retail outlets, the veterinary profession has faced increased competition, which may have driven down prices even for consumers who continue to purchase their pet medications from veterinarians.
They also note that a few regulations and market conditions could alter the power dynamics of the market over time (here I’m expanding and riffing on their suggestions, as it’s been 8 years since the FTC report, and the authors only briefly touched on possible future market dynamics).
First is prescription portability. This means a vet must offer a portable (written) prescription to a consumer who asks for it, allowing the consumer to theoretically shop around. There isn’t a federal law requiring vets to offer this portable prescription, although bills with this provision have been raised multiple times. 40 of 50 states do require vets to offer this in some form. The American Veterinary Medical Association’s Principles of Veterinary Medical Ethics also urges vets to honor consumers’ requests for prescriptions.
There is also a growing sense of consumerism in veterinary medicine. Major retailers, including those that fill human medicine are increasingly interested in the veterinary space—and human pharmacists can technically dispense animal medications, representing a possible future avenue.6
Relatedly, Walgreens, CVS, and Walmart are getting more into animal medications. Walmart’s is the most advanced product, offering the widest selection among the major retailers and with full accreditation as a pet pharmacy—mostly because it’s a white-labeled version of Allivet, another online pet pharmacy.7
Most dramatically would be opening up the industry similar to the contact lens market in the early 2000s or the hearing aid market last year.
Ultimately, however, the FTC report ended inconclusively: “FTC staff is interested to see how this industry continues to develop, in light of consumer demand for safe, low-priced pet medications.”
Big vs. big…and not getting any better
Of course, this isn’t exactly a David and Goliath fight. On one side are thousands of small vet clinics, many of them independently operated (albeit an increasing percentage owned by private equity), as well as major manufacturers. On the other side are major retailers (including Chewy, owned by Petsmart; Walmart; CVS; etc.). And after the Covid-driven pet boom of 2020, the stakes have risen.
In 2021, Chewy sued two software companies, Covetrus (software to manage supply chain, prescriptions, and other business aspects of a vet practice…and also a compounding pharmacy and manufacturer of horse supplements?) and Vetcove (supply and medication purchasing software).
Chewy alleged that Covetrus and Vetcove sent “deceptive communications” to consumers when consumers placed prescription requests through Chewy, diverting consumers to the vet clinic’s online pharmacy alternative.
Vet offices have also gotten more aggressive in their messaging to consumers, urging them not to use major retailers. Anecdotally, my personal vet office has a phone hold message arguing that you can’t trust major retailers’ prescriptions, and their website includes this language:
Is this strategy working? Current data about market share is lacking, so I can't tell.
One other interesting data point (although I hesitate to draw conclusions from it): PetMeds, one of the big online retailers specializing in pet meds, included as a risk factor in its 2011 annual report the diversion of medication. (“We currently purchase a portion of our prescription and non-prescription medications from third party distributors and we are not an authorized distributor of these products. We do not have any guaranteed supply of medications at any pre-established prices.”)
But in fiscal year 2020 (as reported in its 2022 annual report), PetMeds established relationships with most major manufacturers (along with an agreement to maintain their MAPPs—minimum advertised pricing policy) and appears to no longer source medications through the gray market. In other words, manufacturers might be slowly loosening their grip on diversion clauses, but only with strict MAPPs.
Conclusion
The conclusion to my friend’s message, after a book’s worth of research: it’s basically impossible to open a vet pharmacy that’s competitive on price, unless that pharmacy spends its first few years lobbying Congress or the FTC to open up the market. For now, those of us with pets will simply have to pay full manufacturer price.
This information shouldn’t be taken as investment advice (obviously), and the opinions expressed are entirely my own, not representative of my employer or anyone else.
Please also see a16z.com/disclosures for additional relevant disclosures.
All of the good stats I could find are linked back to this Packaged Facts market research report, which naturally costs $5,000 to read. So I can’t fully see the context of this number. But based on my other research for this article, online purchasing of vet meds is driven (pretty dramatically) by flea and tick preventatives. So I would guess that the percentage of other drugs purchased from the vet is actually larger than 80%.
In case you want to dive deep into vet prescribing and the laws that regulate it on a federal level, it’s on page 18 of this FTC report, which I get into much more later: “Pharmaceutical products for companion animals are regulated by the FDA under the Federal Food, Drug and Cosmetic Act. These products may be labeled for OTC or prescription use. The FDA also allows veterinarians to prescribe extra-label use for animals of certain approved human drugs under the Animal Medicinal Drug Use Clarification Act of 1994. Extra-label drug use occurs when a veterinarian prescribes a medication for use in a way other than the label dictates, or when a veterinarian prescribes a human medication for treatment of a pet. Biological products for companion animals, including vaccines and diagnostics, are regulated by the U.S. Department of Agriculture under the Virus-Serum-Toxin Act. Pesticides for companion animals, including flea and tick topical products, are regulated by the Environmental Protection Agency under the Federal Insecticide, Fungicide, and Rodenticide Act.”
A study in JAMA, published in 2022, compared human generic drugs with the veterinary grade generic, finding that the human drugs were several times more expensive. Interesting reminder that (a) generics tend to be cheaper in both human and animal markets, and (b) the human drug channel is still more complicated than the vet drug channel, and some combination of insurance and PBM dynamics is probably pushing that price up.
For human drugs, states have different regulations mandating or recommending that pharmacists substitute equivalent generics for brand-name drugs. Some states have an automatic substitution rule, some states have a recommended substitution rule, and some states require opt-in from the consumer.
The biggest players in the animal pharmaceutical market are mostly subsidiaries of human drug manufacturers, or were spun off from human drug manufacturers: Bayer Animal Health, Boehringer, Elanco (formerly a subsidiary of Eli Lilly), Ceva (which acquired Summit), Merck, and Zoetis (formerly Pfizer Animal Health, now an independent company).
I really got obsessed with pharmacist regulations on this one. Human pharmacists are accredited for animal medications. However, it gets complicated. When pharmacists fill a human prescription, they input their NPI number. They can’t do this for animal prescriptions, because animals aren’t regulated in the same way by HHS, which provides the NPI numbers. They can put in the prescriber’s DEA number—and GoodRx notes that the pharmacist must do this—but actually the DEA (and AVMA) don’t like this. They only want the DEA number used when the medication is truly a controlled substance. The AVMA encourages vets to only give pharmacies their state license number (because that’s the license that permits vets to prescribe medications)—but of course, I’m sure that doesn’t help when you’re working at a CVS or Walgreens and the form demands an NPI number.
Order your meds from Canada or Australia. Especially the monthly stuff. much cheaper.