Veterinary firm barks up the right tree.

A Santa Monica-based company is gobbling up a chunk of an otherwise fragmented segment of the health care industry. It is buying up hospitals at relatively low prices and effectively managing them, analysts say.

In addition, a large corporation with big bucks has been giving it capital to expand even further.

But the patients at these hospitals aren't humans - they're mostly dogs and cats. Veterinary Centers of America Inc. owns a network of veterinary hospitals and laboratories nationwide. And its primary source of capital is Pittsburgh-based H.J. Heinz Co., one of the biggest makers of pet food.

VCA currently owns 37 hospitals nationwide and plans to acquire up to 10 more this year, says President and CEO Robert Antin. It also owns five veterinary laboratories, and has formed a joint venture with Heinz to sell a new line of pet food.

The publicly traded company reported a 67 percent increase in revenue to $42.3 million last year from $25.3 million in 1993. It reported 1994 net income of $589,000, compared with a loss of $1.9 million a year earlier.

Its revenues have been growing steadily all along, from $10 million in 1989 to $14.6 million in 1991 to $18.5 million in 1992.

However, its efforts to launch a pet food division has reined it back into the red, according to Antin. VCA reported a net loss of $592,000, or 9 cents a share, for first-quarter 1995, compared with a loss of $182,000, or 3 cents a share, a year earlier. Revenues were $15.2 million vs. $7.9 million a year earlier.

Its stock closed at $11.25 May 17, off 4.3 percent from its 52-week high of $11.75.

Scratching out a niche

VCA is filling a niche where it has little substantial competition, is able to manage its hospitals effectively while maintaining a high quality of pet care and has been able to gain prestige with the Heinz name behind it, sources say.

There are about 16,000 veterinary hospitals altogether nationwide that generate a total of about $7 billion in annual revenues, Antin says.

But until VCA was rounded in 1986, almost all of these hospitals were independently owned and operated, he says.

"There was not anybody really competing for these businesses," says Bryant Riley, an analyst with Gaines, Berland, a New York-based securities brokerage firm.

Many of the hospitals are owned by veterinarians. When they retire and are ready to sell, it is hard nowadays for the younger vets to buy them because they don't have the money, Riley says. Vets earn about $50,000 a year, Antin says.

Thus, VCA "provided a buyer where there really wasn't one," Riley says.

As a result, the company is able to buy many of the hospitals for four or five times cash flow, Riley says. "That's pretty cheap," he says.

Yet, even though the independent hospitals are being taken over by a larger corporate entity, "the quality of care doesn't change," Riley says.

Focus on care

Veterinarians clearly aren't in their profession for the money but rather for their love of the work and the animals, Antin says.

Thus, VCA officials have had to convince veterinarians over the years that their firm is more focused on the quality of care than in making profits, he says.

Furthermore, Antin, who has a background in the human health care business, has been able to successfully apply the management skills he learned there to the vet business, says an analyst who wished to remain anonymous.

Typically many of the independent hospitals have no management structure. "There's one boss and everybody else reports to that boss," Antin says.

When VCA buys a hospital, he and his team form an organizational structure, complete with technical directors, administrative directors and medical directors, he says. They also do little things to make pet owners feel welcome, such as place a soda machine and free coffee pot in the waiting room, and make sure clients are addressed by name, Antin adds.

VCA's prospects have also been boosted by the joint venture it formed with Heinz in January 1994. Under the agreement, VCA formulated a premium pet food line and Heinz manufactures it.

VCA is seeking to market the food by getting vets at independent hospitals to give it a try-out. To do so, VCA offers these hospitals the food at cost, as well as access to buy supplies at the same prices VCA gets them for, Antin says. VCA is also selling the food at its own hospital.

Heinz has bought $13 million worth of newly issued VCA stock in the past two years, nearly 20 percent of the total shares, giving VCA money to make more acquisitions, Antin says.

Having the Heinz name behind it gives VCA a lot of credibility, the unnamed analyst says.

VCA has also raised $4.5 million from warrants that shareholders have cashed since March because the stock's price has been going up, Antin says.

But VCA has not always had money in its pocket. Early on, it was forging new territory by forming a network of veterinary hospitals, and "banks wouldn't even talk to us," Antin says.

The company bought its first hospital, West Los Angeles Veterinary Medical Group, in 1986, but from there it was slow going, he says. By 1989 it owned only six, all in Southern California.

VCA finally netted about $12 million from an initial public offering it made in October 1991 and began buying hospitals in other states, Antin says.

Ancillary efforts

Overall, Melinda McIntyre, president of Santa Monica-based First Professional Bank, likens VCA's efforts to form a veterinary hospital network to what is going on in human health care today.

"They've chosen to execute a philosophy similar to the group practice in HMOs," she says. VCA has a credit line with First Professional Bank.

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Veterinary Centers of America Inc.

Business: Owns veterinary hospitals and laboratories; sells pet food

Headquarters: Santa Monica 

Year rounded: 1986

No. of employees then: 40

No. of employees now: 1,300

1993 revenues: $25.3 million

1994 revenues: $42.3 million

1993 loss: $1.9 million

1994 net income: $589,000

Officers: Robert Antin, president and CEO; Arthur Antin, senior vice president, chief operating officer; Jean-Charles Lignel, vice president; Neil Tauber, senior vice president, corporate development; Tomas Fuller, vice president and chief financial officer.