We had the opportunity to catch up w/ the CFO to discuss a few issues previously presented by us to the VIC message board regarding changes in Merial's distribution policy.
CFO supported our claim (via intense
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<p><em><strong>We had the opportunity to catch up w/ the CFO to discuss a few issues previously presented by us to the VIC message board regarding changes in Merial's distribution policy.</strong></em></p>
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<li>CFO supported our claim (via intense channel checks; lots of people were hush hush) that in mid-January 2018 (coincidently the time of VIP acq.) Merial changed their distribution strategy <span style="text-decoration: underline;">away from selling to authorized distributors </span>(we then called Merial's head of U.S. accounts receivables who willingly told us there are (7) total authorized distributors selling Merial product: Schein, Patterson, Vesco, Merit, Midwest, Nasco, AHI and that all of them sell strictly to the vet channel and not to PETQ) <span style="text-decoration: underline;">to a 100% agency model</span> (reps getting 2-3% commish on product sales) where Merial sales reps control the product and sell direct to the vet channel which better controls where the diverted product is going. <strong><span style="text-decoration: underline;">We repeat - Merial is no longer selling product via authorized distributors.</span> </strong></li>
<li>But...the CFO then claimed PETQ was "the retail arm" for Merial and PETQ is the exclusive seller of Merial product into the retail channel. This is clearly conflicting information because when we called Merial's head of product ordering (we encourage folks to do the same to fact check) PET<span style="text-decoration: underline;">Q was surprisingly not on thier national accounts customer list or mentioned as a distributor of product</span> - heck, not a single person we spoke to even heard of PETQ. Could PETQ be lying about their source of Merial product? The CFO also claimed that only 1-2% of total product sourced came from the vet channel but that all of PETS' product sourcing is diverted from the grey market - we find this incredibly surprising.Pull up the language in the 10-K on pp. 6: <em><strong>We source these pet Rx medications directly from manufacturers or through licensed distributors" - </strong></em>well, (a) Merial is not selling to authorized distributors anymore, (b) authorized distributors of Merial product only sell to the vets, and (c) Merial doesnt even know who PETQ is - what are we missing??? Based on a convo we had with a different sales manager at Merial he said that Merial is the only mfg. that tracks and traces product by employing a company named Pinkerton Investigations to police product diversion into the grey market - e.g., Merck does not monitor diverted Bravecto and Bayer doesn't monitor diverted Advecta; we find it hard to believe Merial would have a direct relationship selling product to PETQ given what we understand to be a company (Merial) that has become very strict on policing product diversion.</li>
<li>Further, the CFO claimed that Merial "has cut-off all diverted product into the retail channel" <strong><span style="text-decoration: underline;">and very recently <em>"embraced"</em> selling direct to retail</span> (we found out that Merial is now selling Frontline Plus directly to retail including 1800 Petmeds [ticker = PETS; read last q's transcript for new mfg. supply agreements expected in the 10-K because this is totally a new direct relationshop w/ Merial - one that poses a tremendous risk for PETQ and could be a huge downside catalyst once PETS' K is released])<br /></strong></li>
<li>We were also informed that Nexgard is seeing tremendous competition from the likes of Simparica and Credilio (oral chewables) which has led to vet channel share loss for Merial and is a big reason why Merial has embraced selling direct to retail to make up the rev loss</li>
<li>Although the CFO was quiet on Merial's contribution to the product biz, he said "Merial is a huge piece of our branded business"; if we assume Merial is 80% of branded distribution then Merial is easily a $100mm revenue biz on $260mm of product revenue that could be at risk here given the sourcing issues mentioned above.</li>
<li>We learned that the barriers to entry for PETQ include their proprietary NDC code they created in inorder to be in animal pharma. Also, CFO claimed the relationship w/ Anda was their widest moat around the business because "without them our time to servicing retail pharmacies would be 72 hours instead of 24 hours..." and that Anda signed a 5-year non-compete whereby they are the exclusive distributor of PETQ products - after 5 years (who knows when the contract began) they could easily drop PETQ as a source of supply. PETQ's value-add to Anda is essentially (a) "better" retail relationships and (b) lower cost of production.</li>
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