VCA Antech Takes A Bite Out Of Pet Medical Market

Americans pamper their pets. They take them wherever they go. They buy them the best food. They even get them holiday gifts.

More than 60% of American households own a pet, which is up from less than half in 1988. Empty-nesters and aging baby boomers are replacing with animals the void left by departing children, says analystMichael Cox of Piper Jaffray & Co.

"Owners continue to embrace more advanced medical care for their pets, which means they'll pay more," Cox said.

Pet owners spent $36.3 billion on their pets in 2005, up 5.5% from 2004, of which more than $18 billion was spent on veterinarian care and medicine, says the American Pet Products Manufacturers Association.

VCA Antech is benefiting from the growing human-animal bond and the spending it's generating.

VCA WOOF is the biggest U.S. animal health care company in terms of revenue. It posted fourth quarter sales of $241.8 million, up 12% from a year ago.

The Los Angeles company operates one of the largest chains of free-standing veterinary hospitals in the country, behind only Banfield, The Pet Hospital. VCA also operates a highly profitable diagnostic lab business that specializes in vet work.

Its 37 labs provide outsourced testing in all 50 states, covering roughly 15,000 vet clinics. The segment's sales increased 17.6% to $63.3 million, which makes up about a third of VCA's sales.

Broad Services

Tomas Fuller, the company's CFO, said its labs provide a breadth of services, such as diagnostics, ultrasounds, screenings and an array of tests, including blood, urine, tissue and fecal.

"We are seeing the maturation of an immature market as the industry moves to more humanlike care," Fuller said.

The laboratory segment gives the company one of its many competitive edges, Cox says.

"They can go to clients' offices more frequently, some times twice a day, to pick up samples and send the results back within a day or two," he said.

VCA's chain of 375 animal hospitals, operating in 37 states, accounted for 71% of the company's total revenue in the fourth quarter. The chain's same-store sales during the quarter rose 5.5%, the strongest of 2006.

The unit's revenue has grown rapidly because of its hunger for acquisitions over the years.

The animal health care industry is a fragmented market with over 24,000 small, independent chains. This makes the industry ripe for the picking, says analyst Ryan Daniels of William Blair & Co.

Fuller says VCA generally targets 20 to 25 individual hospitals a year with annual revenue of roughly $1.5 million each. But on occasion, VCA makes larger purchases.

In 2004, the company spent $76.5 million on acquiring National PetCare Centers, which ran 69 hospitals in 11 states. Then in 2005, it bought Pet's Choice, an operator of 45 clinics, for $60 million.

Daniels says VCA may seek another big buy as it finished 2006 with $45 million in cash on its balance sheet. In 2007, the company could target some of the country's top private animal hospital chains, such as Healthy Pet or National Vet Associates.

While its buyout strategy exposes it to the risk of rising interest rates because of the debt it can create, Daniels says risks still remain relatively low for VCA.

He says one of the reasons is that animal health care does not come with the myriad of problems that the human sector is exposed to, such as malpractice suits, commercial insurance bureaucracy and higher debt.

General economic conditions also remain a risk, but the industry has enjoyed 35 years of steady growth. It even experienced growth in the last five recessions.

VCA has continued to grow along with its industry. In the fourth quarter, profits rose 15% from the year-ago quarter to 23 cents a share, beating views by two cents.

Excluding the most recent quarter, VCA's earnings have been up over 20% for five straight quarters.

The company raised its full-year guidance in anticipation of continued growth over the next few years. VCA sees 2007 profit of $1.29 to $1.33 a share. Analysts polled by Thomson Financial expect earnings of $1.34 a share.

VCA's revenue forecast of $1.07 billion to $1.09 billion is in line with Wall Street estimates.

The parallels between the human and animal health care sectors continue to grow.

The veterinarian profession is becoming more medically oriented. It is no longer just for pet maintenance, such as shots, spays and basic checkups.

Veterinarians are shifting towards more preventive care and early detection.

Humanized

"In the last five years or so, the industry has evolved," Daniels said. "The humanization of animal health care has increased demand for technology."

He expects diagnostics and radiography, which includes digital imaging, to be the fastest-growing segments in the industry.

VCA's medical technology unit increased fourth quarter revenue 41% to $14 million. The unit got a big boost from the 2004 acquisition of Sound Technologies.

Sound Technologies is the nation's largest supplier of ultrasound and digital radiology equipment for the veterinary market. Fuller says its technology will improve vet services and efficiency.

He says about 40% of pet X-rays have to be retaken because the animal moves. But he says advances in digital imagery will cut that number significantly.

Strong growth continues to fuel innovation within the industry as some of world's biggest pharmaceutical companies are jumping on the animal bandwagon.

Eli Lilly LLY announced its move into the animal health care market with a Prozac-type drug for dogs and cats, while Pfizer's PFE dog obesity medication was just recently approved.

VCA and other top animal health care companies are striking distribution deals with the drug maker to expand their services to vet clinics and owners, who want only the best for their pets.

Copyright 2007 Investor's Business Daily, Inc.