MARKET OVERVIEW

With 62 percent of American households owning a pet, the companion pet industry was worth an estimated $50 billion in 2011. Major retailers are certainly reaping benefits from their interest. With a market capitalization of approximately $7 billion, PetSmart, Inc. just joined the ranks of the S&P 500, replacing oil and gas company Sunoco, Inc. In addition, Pfizer recently spun off a 20 percent stake of its animal health unit in an initial public offering, naming the new company, Zoetis.

Yet, not all is rosy in the pet industry. Concerns regarding trade restriction and the safety and efficacy of pet medications recently forced the Federal Trade Commission (FTC) to hold a one-day workshop on October 2, 2012 that brought together veterinarians, pharmaceutical manufacturers, distributors, and retailers and other concerned parties to discuss the pet product distribution landscape.

DIFFERENT PRODUCT CATEGORIES CREATE DIFFERENT REGULATORY AND CONSUMER ISSUES

Two primary product lines are at issue: prescription animal drugs regulated by the Food and Drug Administration (FDA) and over-the-counter flea and tick products regulated by the Environmental Protection Agency (EPA) as pesticides.

The prescription drug product line is regulated by the Center for Veterinary Medicine of the FDA. Heartworm products are a major product in this category. The flea and tick products, such as Advantage® and Frontline®, are regulated by EPA as pesticides, although characterized in the veterinary world as over the counter drugs. The issue of prescription portability arises only with respect to prescription medications, while distribution issues pertain to both categories.

PET MEDICATIONS DISTRIBUTION PRACTICES RAISE ISSUES ABOUT RESTRAINT OF TRADE AND CONSUMER CHOICE

Of the $50 billion spent on pets last year, nearly $7 billion was spent solely on pet medications. In the public comments submitted in preparation of the workshop, many industry critics argue that exclusive sales policies by drug manufacturers illegally restrain trade and create an uneven playing field. Major brick-and-mortar retailers such as Wal-Mart, PetSmart, PetCo, Target, and your local grocery chain only have access to a small piece of the pet medications market share. The same is true for online retailers. This limited distribution is due mainly to two factors.

Demand is the first factor. When you take your pet to the veterinarian, he or she may not be required to provide you with a written prescription that you can fill elsewhere, or even notify you that you have a right to a portable written prescription. This is because the regulation of veterinarians is controlled by state law and state-level veterinary practice ethical rules, not all of which are alike. A valid prescription from a veterinarian is required for retailers to dispense pet prescription medications.

Supply is the second factor. Major manufacturers, such as Pfizer, Merial, and Novartis, claim to limit their products sales to veterinary practices. This system provides an incentive for both parties. Drug manufacturers receive a veterinarian’s support for their brand-name medications at the customer level, and the veterinarian receives a fee not only for service but also for dispensing medications to clients before they leave the office.

Proponents of the current practice argue that the veterinarian-client-patient relationship uniquely positions the veterinarian to also fill prescriptions. Additionally, supporters argue that retail pharmacists, who are not extensively trained in veterinary pharmacology, are unsuitable to dispense prescription medications to pets that vary in species, breed, and size and pharmacological physiology.

Critics of the current practice question whether these exclusive sales policies illegally restrain trade and deny consumers a choice. This restrained trade is asserted to be a reason why generic drug companies have been unable to penetrate the distribution system, thus maintaining the dominance of higher cost brand-name medications.

Despite the fact that some veterinarians do provide portable written prescriptions, opponents argue that other veterinarian practices make it difficult for a client to request one. Further, they emphasize that natural consumer trepidation of not wanting to offend the veterinarian or hurt the relationship by requesting a written prescription also serves as a barrier to customer choice. Finally, critics argue that pharmacists are well-educated, trained professionals that can work closely with veterinarians to fill prescriptions properly.

THE DISTRIBUTION SYSTEM RAISES CONCERNS REGARDING THE SAFETY, EFFICACY, AND ACCURACY OF PET MEDICATIONS

Another concern in the industry is pet medication safety and efficacy. Even though drug manufacturers claim to exclusively sell to veterinarian practices, it is not uncommon to find pet medications on the shelves of brick-and-mortar retailers or in the stock of online websites. The reliability of these secondary distribution channels varies, and raises questions regarding product stewardship during distribution.

The secondary distribution channel exists through a practice called diversion. Diversion is a system whereby veterinarians buy medications from manufacturers and sell them to distributers or retailers. In some instances pharmaceutical representatives have been alleged to divert product to retailers.

Mary veterinarians object to the reduced revenue they lose by not dispensing product. Pet owners have expressed concerns regarding retailers’ ability to ensure the safety, efficacy, and accuracy of the pet medications. Finally, regulators are concerned over instances where certain secondary market participants have introduced counterfeit products into the marketplace.

MOST MAJOR PLAYERS IN THE PET MEDICATIONS INDUSTRY HAVE JOINED IN THIS DEBATE

The focus on these issues has brought out virtually every interested industry segment. Supporting the current practice are several organizations including the American Veterinary Medical Association (AVMA), the Society of Veterinary Hospital Pharmacists (SVHP), the American Animal Hospital Association (AHHA), the Animal Health Institute (AHI), which is the trade association of major pharmaceutical manufacturers, and the American Veterinary Distributors Association (AVDA). Advocates of industry change include generic drug manufacturers and distributors and major retailors. These organizations were represented at the October 2, 2012 workshop, or have submitted public comments to the FTC.

The contentiousness over distribution of these products is reflected by the litigation that has revolved around the over-the-counter products. Bayer sued Eli Lilly over marketing issues related to Bayer’s Advantage® flea and tick product, while Merial, marketer of the competing Frontline® product line, sued Bayer also related to marketing issues.

PENDING FEDERAL LEGISLATION COULD CHANGE THE LANDSCAPE

The current solution on the table is the Fairness to Pet Owners Act (H.R. 1406), which is pending in a House of Representatives subcommittee. FTC workshop participants said this legislation could do to the pet medications industry what the Fairness to Contact Lens Consumers Act did to the contact lens industry in 2003.

H.R. 1406 would require veterinarians to provide written prescriptions for all pet medications and to inform their clients that they have the right to fill the prescription elsewhere. The legislation also directs the FTC to promulgate rules that carry out the bill’s provisions and defines a violation as an unfair or deceptive act or practice under the Federal Trade Commission Act.

This legislation would have the affect of opening the distribution channels to retailers as the market becomes flooded with prescriptions needing to be filled and cost-savvy consumers.

The American Veterinary Medical Association, the national veterinarian trade association, contends that there is no problem with the current dispensing procedures, thus mandatory prescription writing in unwarranted. Retailers, however, argue that there is a problem. To fix it, this federal legislation would ensure supply that in turn could usher in lower prices for consumers. Retailers draw attention to the fact that the legislation will not affect a veterinarian’s ability to dispense pet medications as well.

CONCLUSION

The FTC is keeping a close eye on companion animal products. The agency is interested in the public’s opinions on the types of topics raised in this advisory and has extended the public comment period until November 1, 2012. The Federal Register notice announcing the extension can be found at 77 FR 58840.