1、Animal Health Supply Chain Bull/BearLife Science Tools&Diagnostics18 December 2019Erin WrightResearch Analyst(212)538-4080Erin.wrightcredit-Katie TryhaneResearch Analyst(212)325-2713Katie.tryhanecredit-Haley ChristofidesResearch Analyst(212)325-3720Haley.christofidescredit-Matthew UrbikResearch Anal
2、yst(212)325-2152Matthew.Urbikcredit-Equity Research AmericasDISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-USANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered i
3、n its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that couldaffect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.This is an updated version of the document publ
4、ished yesterday to incorporate takeaways from our Bull/Bear Lunch.2December 18,2019Traditional Distribution Channels(CVET,PDCO,ABC)Bull/Bear ScenariosIndustry DynamicsBull Case Bear CaseUnderlying Pet IndustryFundamentalsStrength in Pet Spending:Demand across the companion animal market remains robu
5、st,with pet adoptions up+5.6%in November and veterinary Rx volumes up+6.1%YTDCyclicality of Discretionary Spending:While the pet market is relatively recession resilient,overall market downturns could result in slowed spending/adoption trendsRise of Alternative ChannelsVFC/Vetsource Remains a Bright
6、 Spot:VFCs role to veterinarians becomes increasingly critical as vet revenue from prescriptions moves online;still a fragmented marketLandscape Evolving Rapidly:With 35%of vets willing to partner with CHWY(according to our survey),VFC may face intensifying competitive dynamicsManufacturers Going Di
7、rectRole of Distribution Remains Intact:Manufacturers have reiterated that they plan to use a hybrid direct/distribution modelRole of Traditional Distribution Limited:Manufacturers will increasingly sell directly to vets/online,disintermediating the distribution channelOther Industry DynamicsMAP Pri
8、cing Raises Industry Price LevelsVendor Concentration SlowingLarge Salesforce Differentiates PlayersMAP Pricing may have Mixed Margin Implications over TimeVendor Consolidation likely to ContinueRequired Salesforce Investment GrowingCovetrus:Company-Specific DynamicsVets First Choice Will VFC be a m
9、eaningful contributor to CVET and veterinary revenues?Pharmacy Management Growth Driver Underappreciated:VFC is conceptually appealing,indicated positively in our survey,and it will become more meaningful as the supply chain continues to evolveVFC Uptake Weak;CHWY Poses a Threat:Vets in our survey o
10、nly attribute 5%practice revenues to VFC,and the e-Rx space is evolving faster than anticipatedLoss of RelationshipsIs CVET losing share to MWI and PDCO?Status Quo/Stabilizing:Revenues rose 4%in 3Q19,above estimates,and CVET has reported no major customer losses since VCA Potential Share Loss Likely
11、:CVET previously attributed revenue weakness to lackluster N.American demand,but our survey results suggest share gains by MWI and PDCO Management ChangesManagement Transition Offers Hope for LT Strategy:With both the CEO and CFO roles in transition,the appointment of permanent top management may of
12、fer a clearer strategy to achieve a longer term turnaround storyPotential Further Guidance Cuts:While new management may offer a clearer strategy,it may also further recalibrate guidanceValuationUpside following recent pullback:CVET shares are down 46%since its spin from HSIC,trading at 12.5x EV/EBI
13、TDA,well below the Animal Health average(18.3x)CVET still trading at premium:At 12.5x EV/EBITDA,CVET still trades at a premium to distributors PDCO(9.6x)and ABC(7.5x)3December 18,2019E-Commerce(Chewy)Bull/Bear ScenariosIndustry DynamicsBull Case Bear CaseUnderlying Pet IndustryFundamentalsStrength i
14、n Pet Spending:Demand across the companion animal market remains robust,with pet adoptions up+5.6%in November and veterinary Rx volumes up+6.1%YTDCyclicality of Discretionary Spending:While the pet market is relatively recession resilient,overall market downturn could result in slowed spending/adopt
15、ion trendsRelationships with ManufacturersLegitimizes Alternative Channels:Manufacturers like ZTS and ELAN increasingly sell to online channels,legitimizing and centralizing the platforms in the supply chain(less utilization of gray markets)Risk of Shifting Vet Relationships:Manufacturers remain com
16、mitted to the vet channel and may pick and choose which products to sell online/remain loyal to distribution channelMAP PricingDoes this dynamic help or hurt e-commerce constituents?MAP Pricing Levels Help Margins:Price floors improve gross margins NT for e-commerce players,eliminating aggressive co
17、mpetitive discountingRemoving Competitive Advantage:Price floors level the playing field,forcing online sellers to compete on other factorsOther Industry DynamicsIncreasing Consumer Preference Towards OnlineShift to Online Channels Across Animal Health Convenience and ComplianceVet Channel ControlIn
18、tense Competitive Landscape(WMT,AMZN,PETS)Model Easy to Replicate at Low CostChewy Company-Specific DynamicsPartnerships with VetsWill veterinarians be willing to partner with CHWY?Better than Expected Sentiment:35%of veterinarians say they would be willing to work with CHWY if the economics were fa
19、vorableVeterinary Bias Remains Negative:Many vets remain unwilling to partner with alternative channels that may encroach on revenue Margin Dynamics/Rising Customer Acquisition CostsHow will CHWY scale costs to achieve profitability?Costs Scaling with Revenues:Margins should expand as CHWY expands i
20、ts customer base and spend per active customerCustomer Growth Decelerating:CHWY may not be able to maintain its robust customer growth,forcing it to amplify advertising and marketing initiatives;Rising customer acquisition costsChewy Pharmacy UptakeWill Chewy Pharmacy achieve meaningful growth prosp
21、ects?Healthcare Growth Driver Underappreciated:While Chewy Pharmacy represents 5%of revenue,the segment has the potential to be a highly profitable growth driverNascent Initiative:Chewy Pharmacy may remain a negligible part of CHWYs overall business,contributing little to topline or margin growthOth
22、er Company DynamicsGeographic Expansion OpportunitiesGreater Private Label Penetration Upcoming Services Platform Offering Regulatory Environment(Grain-free dog food)Increasing Private Label Competition(AMZN)Ownership Concentration of PetSmartValuationSignificant Discount to Peers:With CHWYs shares
23、off 20%since its June 14th IPO,its shares trade at only 1.8x CY20E EV/Sales,a discount to peer groups of e-commerce retail platforms(4.7x),AH products and services(3.5x),andHCIT services companies(3.2x)Risks Justify Discount:With evolving supply chain dynamics,an uncertain margin trajectory,and an i
24、ntense competitive environment,CHWY should trade at a meaningful discount to peers.Ownership also remains a technical overhang.Supply Chain Bull/Bear Survey Takeaways4Source:Credit Suisse,N=10CVET Takeaways76%of investors are Bearish on their outlook of CVETMost MeaningfulLong Term Opportunity for C
25、VET:VFC Utilization Growth(Revenue/Clinic Growth),New Customer Wins,VFC Enrollment GrowthLeast Relevant Long Term Opportunity:Expansion through M&A,Global Expansion,Technology/Value Add PenetrationTop Risk Factors for CVETs Distribution Segment:Competition from Online Retailers,Depleting Market Shar
26、e,Customer LossLeast Relevant Risk Factors:Leadership Changes,Cost Management,Macro RisksTop Pharmacy Channel Competitors for CVETs VFC Platform:Chewy Pharmacy,Amazon,VetsourceCHWY TakeawaysInvestors are evenly split Neutral-to-Bullishon their outlook of CHWYMost MeaningfulLong Term Opportunity for
27、CHWY:Chewy Pharmacy Traction,Accelerating Customer Growth,Private Label ExpansionLeast Relevant Long Term Opportunity:Greater Autoship Penetration,International Expansion,Launch of Services PlatformTop Risk Factors for CHWY:E-Retail Competition(WMT,AMZN,PETS),Cost Management/Rising Customer Acquisit
28、ion Costs,Shift in Consumer TrendsLeast Relevant Risk Factors:Regulatory Environment(Grain-Free Dog Food),Advertising/Marketing Missteps,Ownership StructureView on CVETView on PDCOView on CHWYView on PETSBullish,11%Neutral,11%Bearish,67%Terminal View,11%Bullish,11%Neutral,78%Bearish,11%Bullish,50%Ne
29、utral,50%Bullish,10%Neutral,30%Bearish,60%December 18,20197.56.86.34.84.54.04.03.93.11.40.01.02.03.04.05.06.07.08.0CVETPETSPAHCKINHSKAIDXXPETQELANCHWYZTSSupply Chain Bull/Bear Survey Takeaways5Overall,ZTS was viewed as best positioned to outperform the group,followed byCHWY,ELAN,PETQ,IDXX,HSKA,KIN,P
30、AHC,PETS,and CVETCVET:What Would Make You More Positive/Negative?More PositiveMore NegativeShare StabilizesSimparica Trio not in ChannelEBITDA GrowthCustomers Selling DirectAccelerating VFC GrowthShare LossMargin ExpansionGains in Alternative ChannelsInability to Control CostsSlowing Topline/GM Cont
31、ractionMore PositiveMore NegativeMargin ImprovementNegative FCF GrowthUnderstand PE/PetSmarts Plan to Sell SharesZTS Push for Vet ChannelTakeout InterestLTV/CAC DeteriorationPrivate Label PenetrationChurnARPU GrowthCHWY:What Would Make You More Positive/Negative?Best PositionedDecember 18,2019Source
32、:Credit Suisse,N=10ZTS/IDXX and Dognostics Dynamics100%of investors view ZTS will be successful in its broaderdiagnostic offeringCommentary:It will take multiple(5)years to complete67%of investors do not view ZTSs entrance into domestic reference labs willhave a negative impact on IDXXCommentary:Sha
33、re going to AntechNTM limited impact but LT meaningful impactNegative impact on share price but not financials6December 18,2019Companion Animal Prescription&Distribution Market7December 18,2019Animal Health Competitive Landscape The Animal Health sector is an attractive,unconventional healthcare nic
34、he,with much of the inherent resiliency and defensivecharacteristics of human health care while unchained to associated risks such as third party payors,health care reform,genericthreats,and development inefficiencies.Fundamentals in terms of demand,pricing,and the utilization of medicines,vaccines,
35、anddiagnostics are improving,supporting increasing revenue and earnings growth assumptions.CSPriceUpside/12/17/19MarketAvg VolRevenue(CY)Avg(5yr)EPS(CY)Avg(5yr)EBITDA(CY)Avg(5yr)P/Sales(CY)P/E(CY)EV/EBITDA(CY)DividendTickerRatingTarget DownsidePriceCap(000s)20192020Growth20192020Growth20192020Growth
36、201920202019202020192020YieldProductsZoetisZTSOutperform$1389%$127.17$60,9932,362$6,235$6,6515%$3.58$3.9818%$2,484$2,70712%9.8x9.2x35.5x31.9x26.4x24.3x0.5%IDEXX LaboratoriesIDXXOutperform$29314%$256.41$22,679540$2,401$2,63510%$4.75$5.3820%$640$71712%9.4x8.6x53.9x47.6x36.8x32.9x-Elanco Animal Health(
37、1)ELANRestricted$28.54$10,6463,988$3,077$3,1220%$1.07$1.22146%$669$78054%3.5x3.4x26.7x23.4x18.6x15.9x-Phibro Animal HealthPAHCNeutral$252%$24.46$992172$827$8625%$1.09$1.2029%$107$1099%1.2x1.2x22.5x20.4x11.6x11.4x2.0%Genus plcGNS-GB$32.16$2,09387$504$5396%$0.75$0.841%$80$88-4%4.2x3.9x42.8x38.1x27.3x2
38、4.7x-NeogenNEOG$68.31$3,581151$424$45212%$1.18$1.2817%$93$10414%8.4x7.9x58.0 x53.4x35.8x31.9x-Dechra PharmaceuticalsDPH-GB$28.20$2,899250$510$56319%$0.93$1.0333%$142$15522%5.7x5.2x30.2x27.3x22.1x20.1x-VirbacVIRP-FR$220.00$1,8617$940$9903%$6.58$8.7318%$154$173-1%2.0 x1.9x33.4x25.2x14.9x13.2x-Vetoquin
39、olVETO-FR$62.80$7462$390$4104%$2.85$3.3610%$59$657%1.9x1.8x22.0 x18.7x10.7x9.8x-HeskaHSKA$94.06$73680$123$14011%$0.02$0.3052%-90%6.0 x5.3x4703.0 x313.5x-Average(excl.HSKA)7%32%14%5.1x4.8x36.1x31.8x22.7x20.5xDistributors,Services&RetailPatterson CompaniesPDCOOutperform$2519%$20.95$1,9721,092$5,597$5,
40、7238%$2.12$1.944%$259$262-8%0.4x0.3x9.9x10.8x9.7x9.6x5.0%CovetrusCVETNeutral$11-19%$13.50$1,5152,549$3,963$4,1548%$0.54$0.81-$193$21160%0.4x0.4x25.1x16.7x13.7x12.5x-Petmed ExpressPETSUnderperform$14-39%$22.88$461530$276$2834%$1.16$1.1219%$30$2914%1.7x1.6x19.7x20.5x12.1x12.8x4.7%PetIQPETQ$24.83$58244
41、7$68580819%$1.14$1.33-$62$80-0.8x0.7x21.7x18.7x10.1x7.8x-ChewyCHWY$28.05$1,5002,842$4,7265,995-$0.65-$0.51-$107-$12-0.3x0.3x-Average10%12%22%0.7x0.7x19.1x16.7x11.4x10.7xPet-Biotech/OtherKindred BiosciencesKIN$7.84$306103$4$11-$1.54-$1.32-$56-$54126%73.7x28.9x-TrupanionTRUP$34.68$1,212304$383$46531%-
42、$0.06$0.07-$11$17-119%3.2x2.6x-505.7x108.7x68.3x-Average31%-3%38.4x15.7x-505.7x108.7x68.3xLarge-Cap PharmaceuticalsMerck&CoMRK$89.00$226,5938,000$46,824$49,450-2%$5.16$5.6317%$19,756$21,309-1%4.8x4.6x17.3x15.8x12.3x11.4x2.5%BayerBAYN-DE$70.06$65,3372,412$44,123$45,362-2%$6.41$7.3323%$11,536$12,7033%
43、1.5x1.4x10.9x9.6x8.8x8.0 x1.4%Average-2%20%1%3.2x3.0 x14.1x12.7x10.5x9.7xTotal Average-12%7.8x4.9x28.7x25.2x18.1x16.4x($in millions except/share)(1)ELAN based on FactSet Consensus estimatesSources:Company data,Credit Suisse estimates,Factset.Prices as of 12PM 12/17/19.8December 18,2019Companion Anim
44、al Industry SnapshotUS Pet Expenditures(APPA)1994-2019E,$in billions2019E US Pet Expenditures Breakdown$17$21$23$29$30$32$34$36$39$41$43$46$48$51$53$56$58$60$67$70$73$75$0$10$20$30$40$50$60$70$80$in billionsUS Pet Expenditures by Category(APPA),yoy growthCategory201420152016201720182019EFood3.2%3.5%
45、22.5%3.0%4.3%4.5%Supplies/OTC Medicine4.6%3.9%3.0%2.7%6.0%2.7%Vet Care4.7%2.5%3.4%7.0%6.1%4.8%Grooming&boarding9.8%11.8%6.5%6.9%(0.8%)3.3%Live animal purchases(3.6%)(1.4%)(0.9%)0.0%(4.3%)(2.0%)Total4.2%3.9%10.7%4.1%4.4%3.9%Sources:APPA,Gfk,Company data,Credit Suisse.Food42%Supplies/OTC Medicine22%Ve
46、t Care24%Pet Services:grooming&boarding9%Live animal purchases2.6%Pet care expenditures:$75 billion in 2019E,growing mid-to-high singledigits annually.Key drivers of companion animal spending:Increasing pet ownership:Pet adoptions grew 0.1%in 2018 whilesurrenders and euthanasia decreased(-3.1%and-13
47、.4%,respectively).Humanization of pets:90%of dog owners and 86%of cat ownersconsider their pets as important members of their family,supportinggreater spending per animal through a variety of channels includingpremium consumables,pet healthcare,and pet goods and services(Packaged Facts).Rise of e-co
48、mmerce driving compliance:Online penetration for petfood and supplies is estimated to be$11 billion(in 2019)and is expectedto grow at a double digit CAGR through 2022(Packaged Facts).9Pet care expenditures have been growing at a mid single digit rate for the past two years,driven more by price incre
49、ases thanby volume-possible evidence of a shift towards online channels.Pet Care(rolling 3-month average growth)excluding onlinePet Food(rolling 3-month average growth)excluding onlinePet Supplies(rolling 3-month average growth)excluding onlinePet Treatments(rolling 3-month average growth)excluding
50、onlineSource:Nielsen,Company data,Credit Suisse researchPet Care Expenditures December 18,20191.9%1.5%2.0%1.6%2.3%2.1%2.3%2.3%2.3%2.4%1.9%1.4%1.5%1.3%0.8%0.3%0.8%1.3%1.3%1.3%1.3%2.0%1.4%1.5%0.9%1.5%1.9%2.1%2.4%2.4%2.4%2.2%2.1%2.5%2.2%2.9%3.2%4.4%3.8%4.0%4.1%5.3%6.2%6.5%6.6%6.7%6.6%6.3%5.2%5.0%4.2%0%
