Spotlight on Veterinary Generic Drugs (Sponsored by Putney)

Your pharmacy and veterinary generic drugs: A win-win solution in the battle for this business

Jeff Rothstein, DVM, MBA

President, Progressive Pet Animal Hospitals

"The Times They Are a-Changing" — that was the title of a meeting I recently led for all of the doctors and managers in my hospital group (Progressive Pet Animal Hospitals). We discussed the results of a recent veterinary care usage study that identified key contributing factors for the decline in the number of dog and cat visits to veterinary clinics in the past several years.1,2 Statistics show that nearly one-third of pet owners have cut back on the number of visits to their veterinary hospital,3 and 45% of clients are postponing care for sick pets.4

Jeff Rothstein, DVM, MBA

As veterinary visits have dropped, pet owners' willingness or ability to spend money on medications has declined as well. Whether it's for heartworm preventives or antibiotics for a urinary tract infection, many clients are less compliant about administering medications to their pets than in the past.

All of these issues reduce veterinary practice revenue and profit, and ultimately challenge practice viability. Most importantly, they threaten the patients' health and quality of life.

Price sensitivity and pharmacy vulnerability

A study published in 1999 revealed that pet owners ranked price low on a list of factors they deemed important when choosing a veterinarian.5 Therefore, veterinarians believed that if the quality of their services remained high, they could raise prices without reducing client demand for services and still increase revenue. This may have been true once, but the times they have "a-changed." The economic recession and the rising cost of veterinary care pose major challenges for future veterinary practice growth.1,2 Pet owners have expressed alarm about the amount and frequency of price increases in veterinary care.1,2

With regard to price sensitivity, the pharmacy is one of the most at-risk areas of a veterinary practice's business. And because the pharmacy has traditionally accounted for about 30% of a practice's gross revenue, this is a real concern. Clients usually choose to have their veterinarian perform all the medical care for their pets, but veterinary-prescribed medications are a commodity that clients can now easily purchase from online pharmacies and retail superstores.

Some veterinarians are resigned to relinquish a majority of their pharmacy revenue and hope to make up for it by providing more medical services at higher costs. But how? Doing so may reduce your pharmacy revenue and could cause price-sensitive clients to seek medical services elsewhere. One study found that 26% of pet owners consistently look for less-expensive veterinary options.1,2

The pharmacy battle will continue to escalate

As an owner of multiple veterinary practices, I think it is important to fight to keep our veterinary pharmacy business because it has a big impact not only on practice profitability, but also on practice value. This alone should be a motivator for you to battle to retain your pharmacy business. And it will be a battle, as the pressures from competitive pharmacies continue to grow. If Congress enacts legislation such as House Resolution 1406 — which would require veterinarians to provide clients written prescriptions for all medications prescribed — this will undoubtedly make it easier for clients to have their prescriptions filled elsewhere based on price.

Your pharmacy's armory: Convenience, compliance, trust

In one survey, 77% of pet owners said they preferred to purchase prescription pet medications at their veterinarian's office.6 Convenience and compliance are important reasons to encourage clients to purchase their pets' drugs during an office visit.

As part of your battle to bolster your pharmacy, implement a multimodal strategic approach to help ensure clients choose your hospital as their pets' pharmacy:

Describe your pharmacy's advantages

Educate clients about the benefits of purchasing medications from your hospital vs. purchasing prescriptions from online or outside pharmacies. Remind clients that your hospital will keep a record of all medications that each pet receives. Tell them you will always explain when to expect to see a response to treatment and any potential side effects or drug interactions. The bottom line: you are in the best position to oversee their pet's treatment and well-being.

Dispense veterinary generic drugs

You already know that veterinary generic drugs are FDA-approved and are therapeutically equivalent to their brand-name counterparts. But they also offer financial benefits for both you and your clients. Maintaining an inventory of veterinary generic drugs makes it easier to give clients more affordable, quality options. Because the cost of drugs may prevent clients from complying with your treatment recommendations, make sure clients are aware that purchasing medications from your hospital is often not more expensive. This is especially true when you offer generic drugs, rebates and promotions, and other options. The recent veterinary care usage study showed that the #1 way to increase dog visits and the #3 way to increase cat visits was to offer competitive product pricing.1 So by offering generic drugs, you may increase client visits as well.

Eliminate barriers

Agree to match prices offered by a major competing pharmacy on certain products, if price is a barrier to the client. This may be controversial for some practice owners, but only about 25% of clients ask for a discounted prescription.1,2 Why lose those sales altogether?

Evaluate pricing

Evaluate your overall drug pricing model and philosophy. Pinpoint how the pharmacy helps your hospital prosper medically and financially. The veterinary hospital pharmacy should be a profit center, but the motive for selling pharmaceuticals should be to strengthen the client-hospital relationship, not to raise your average client transaction by selling costly products.

Bolster compliance

Keep in mind that compliance improves with cost-effective, quality drug options. A recent study showed that when a veterinary generic NSAID was introduced, 14% more dogs were treated with an NSAID.7 The experience of our human counterparts supports this trend as well. A study of human patients involving 7,532 prescriptions demonstrated that those who took a generic drug had 62% greater odds of achieving adequate adherence.8

Strengthen the client-hospital bond

Remember that your pharmacy is also an avenue for keeping in touch with clients, often on a regular basis, when prescription refills are needed. This frequent contact leads to a stronger client-hospital bond. In addition, it gives your practice another opportunity to inquire about your clients' other pets and their health needs.

Fortify your pharmacy: Update your pricing and markup practices

One survey found that a veterinarian's recommendation was the most influential factor for pet owners in purchasing prescription pet medications, and 77% of owners said they buy medications at their veterinarian's office because they trust the medications they purchase there.6 By providing value to your client through your pharmacy, you will further strengthen a trusting relationship.

Reasonable pricing of your pharmaceuticals is important. You do not want clients to feel you overcharged them when they see a lower price for the same product online or elsewhere. If clients perceive that your products are overpriced, then they may infer that all your fees are high — that you are the "expensive" clinic — and you will lose their trust. Be sure to evaluate your markup policy on prescription medications. One formula should not be used to calculate the markup for all products. For example, medications prescribed for patients to treat chronic conditions might have a lower markup than medications that are administered only once.

In general, you can use a higher markup on a generic vs. a brand-name product. For example, many practices typically mark up products 2 to 2.5 times their cost. In my experience, generic drugs can often be marked up 25% to 50% more than this markup and still be more cost effective for clients than the brand-name counterpart. This is a win-win-win situation for pets, clients, and clinics, as pet owners are more likely to purchase medications directly from your hospital and the pet receives prompt treatment.

Veterinary generic drugs help your pharmacy

Veterinary generic drugs are especially helpful in allowing your practice to adopt reasonable pricing and protect pharmacy revenue. They are typically 25% to 60% less expensive than pioneer drugs, allowing your hospital to tie up less money in drug inventory. Generic drugs also provide lower cost options for clients, yet these drugs can have a higher markup as discussed, which results in a higher profit margin for the practice. I have found that offering veterinary generic drug options frequently allows my practices to keep these sales in-house.

Offering veterinary generic drugs may also grow your pharmacy. A recent study showed that the simple act of offering a veterinary generic NSAID led to an increase of 10% revenue in that drug category, as well as better compliance.7 More clients opted to treat their pets because the generic drug was priced to fit their budget, and because the cost seemed reasonable, fewer clients felt compelled to price-shop.

Veterinary generic drugs support clients and patients

The cost savings that veterinary generic drugs provide can be the factor that allows clients to choose to treat their pets, especially pets with chronic conditions. However, many clients simply are not aware generic options are available for their pets. In one survey of pet owners, more than half were unaware of generic drug alternatives to brand-name pet medications.6 Given the choice of a generic drug from their veterinarian, however, many pet owners prefer this option. A veterinarian recommendation more than doubles clients' willingness to purchase generic pet medications.6

We have come to expect our own physicians to prescribe generic drugs over brand-name drugs if a generic drug is available. In fact, about 80% of prescriptions in human medicine are filled with generic drugs.9 Simply letting your clients know they have an option to treat their pets with veterinary generic drugs makes a big difference. They appreciate your concern for their budget, and this helps build trust. From my perspective, I want the pet to receive the important drugs it needs, and I want the client to be satisfied.

Defend your pharmacy with win-win-win solutions

Veterinary practices will continue to face major challenges, including protecting their pharmacy business. As Bob Dylan sings, There's a battle outside/And it is ragin'/It'll soon shake your windows/And rattle your walls/For the times they are a-changin'. Each practice and practitioner must decide how they are going to prepare for battle and approach the issues facing our profession.

Remember that an affordable pharmacy provides other advantages to a veterinary practice besides monetary profit. I believe that veterinarians need to recognize the importance of the pharmacy in their clinics and use a multimodal strategic approach to keep it viable.

Offering veterinary generic drugs is a win-win-win solution for pets, clients, and practices. It can be an integral component of providing clients more affordable veterinary care options. Generic drugs are therapeutically equivalent to their brand-name counterparts, and they keep inventory costs down, boost practice profitability, save clients money, and allow more pets the opportunity to receive proper treatment and follow-up care.

Focusing on protecting your pharmacy is a good starting point to leading your business successfully into battle in this new era of veterinary medicine.

Dr. Rothstein is the president of Progressive Pet Animal Hospitals and Management Group, which owns and operates a group of small-animal hospitals in southeastern Michigan.

REFERENCES

1. Bayer HealthCare LLC. Bayer Veterinary Care Usage Study, 2011: The decline of veterinary visits and how to reverse the trend.

2. Volk JO, Felsted KE, Thomas JG, et al. Executive Summary of the Bayer Veterinary Care Usage Study. J Am Vet Med Assoc 2011, 238(10): 1275-1282.

3. Trone, Inc. Economy driven changes in pet owner behavior. Available at

http://www.trone.com/2010/09/economy-driven-changes-in-pet-owner-purchase-behavior. Accessed March 5, 2013.

4. NCVEI January 2010 poll of veterinary team members.

5. Brown JP, Silverman JD. The current and future market for veterinarians and veterinary medical services in the United States. J Am Vet Med Assoc 1999;215(2):161-183.

6. Babson Consulting Alliance Program. Pricing and purchasing behavior analysis. May 2011.

7. Proprietary study completed by VetMetrics June 2010. All rights reserved by Putney Inc.

8. Shrank WH, Hoang T, Ettner SL, et al. The implications of choice: prescribing generic or preferred pharmaceuticals improves medication adherence for chronic conditions. Arch Int Med 2006;166(3):332-337.

9. U.S. Food and Drug Administration. Facts about generic drugs.

Available at http://www.fda.gov/drugs/resourcesforyou/consumers/buyingusingmedicinesafely/

understandinggenericdrugs/ucm167991.htm. Accessed March 5, 2013.

VETERINARY GENERIC DRUGS

Help in the fight to keep product sales

Fritz Wood, CPA, CFP

The past few decades have shown a sea change in product sales in small-animal veterinary practices. The profession has witnessed the introduction of blockbuster product categories and drugs. Unfortunately, some veterinary practices grew increasingly, and perhaps dangerously, reliant on product sales. Two decades ago, the ratio of service sales to product sales might have been 90% services:10% products or 85%:15%, but it is now in the 65%:35% or 70%:30% range.

Fritz Wood, CPA, CFP

Today, pet owners can easily purchase popular pet drugs on the Internet, at pet retailers and farm stores, and at mass-market discount stores. Unlike service sales, product sales are relatively easily displaced at the whim of the pet-owning public. Few businesses can withstand the loss of one-third of their total gross income. Profits from product sales help every practice cover their fixed overhead expenses (e.g. occupancy costs, salaries and wages, monthly lease payments, utilities). So, 'fight' is not an option. 'Fight' you must.

How to compete

Michael Porter — business strategist, noted author, and longtime Harvard Business School professor — offers four options to secure a competitive advantage: selection, price, quality, and service.

Presumably, a veterinarian's strong suits are quality and service. No alternative channel competitor has a veterinarian-client-patient relationship, and none provide the expert opinion, professional advice, handholding, peace of mind, and service provided by veterinarians and their health care teams. As for selection, your practice's own online pharmacy can offer a huge selection since the products are not stored and merchandised at your clinic. And too many practices wrongly dismiss price as a competitive advantage. We've all heard practitioners and managers lament, "I can't compete with..." Offering veterinary generic drugs allows you to compete on price.

Pricing veterinary generic drugs

I present two pricing strategies to consider for offering veterinary generic drugs in practice. The first is to make the same dollar amount of profit as with the branded product.

Strategy 1*

Another reasonable, but more aggressive pricing strategy for veterinary generic drugs is to establish a price slightly below the online branded product.

Strategy 2*

Simple graphs like in these two examples send a host of positive messages to your clients:

• We understand that no one wants to overpay for prescription medications.

• We understand this is a competitive market.

• We're aware of and sensitive to the competition; our prices are competitive.

• We're not embarrassed about our prices — in fact, we're proud of them.

• You can count on us to provide excellent value.

• All of our prices are fair and reasonable.

The practice earns well-deserved goodwill by pointing out the various options. Clients will appreciate your honesty and candor and that your practice is sensitive to their financial situation. And if you fail to make them aware of the less-expensive option of veterinary generic drugs, when they do learn about it, you risk losing the remaining lifetime value of that client, not to mention any future referrals. And clients who believe they were deceived are far more likely to sabotage your reputation online.

Improved compliance

Even without an advanced degree in economics, you know and understand the generally inverse relationship between cost and quantity. As price decreases, quantity consumed increases. Conversely, as price increases, volume consumed decreases.

Until the laws of economics no longer apply, lower-priced veterinary generic drugs must improve compliance. A greater percentage of pet owners will be able and willing to follow through on the treatment plan you recommend. A greater percentage of pets will benefit from that treatment plan. And if you believe improved compliance results in better outcomes, it's the only possible result. So, while Strategy 1 held the unit gross profit static at $47.70, with both strategies, the volume of prescriptions dispensed would most assuredly increase with the lower-priced veterinary generic drug. Keep in mind that as the veterinary pharmacy business evolves, so should your pricing strategy.

Shrink your inventory and drug expense

Since the onset of the Great Recession, practice owners and managers have closely monitored their inventory levels and corresponding drug and supply expenses, which are the #2 practice expense after labor. In the pricing strategy examples, at any given time, the dollar value of on-hand NSAID inventory shrank by 56% (from $47.70 to $20.99). It would be beneficial if your second largest expense — drugs and supplies — was reduced by more than half.

Finally, remember that at the point of service, nothing is more convenient for the client than dispensing from the exam room. No competitor has a veterinarian-client-patient relationship, and none provide the expertise, professional advice, and service provided by veterinarians and their health care teams — all at a fair and reasonable price for you and the pet owner.

Mr. Wood is a certified public accountant and a certified financial planner who consults with veterinarians and the veterinary industry. Mr. Wood served on the Board of Directors of the American Veterinary Medical Foundation and served on the Pricing Subcommittee of the National Commission on Veterinary Economic Issues (NCVEI).