Review 2020: COVID-19 rips up animal health rule book and presents whole new landscape

13:02 PM | January 14, 2021 | Joseph Harvey

2020 will always be remembered for the global struggle against COVID-19. While animal health was initially impacted by the pandemic and the consequences still reverberate, the sector has turned necessity into invention with 2020 becoming a new year zero for many growth trends. IHS Markit Animal Health editor Joseph Harvey looks at how the industry experienced reinvention and retained its future promise.

A key term for the animal health industry in 2020 was ‘convenience’. As well as ensuring the safety of employees, companies were committed to guaranteeing an expedient supply of products to customers.

This was most evident in the companion animal sector with the ongoing adoption of e-commerce and telemedicine – both notable pre-pandemic trends that were further accelerated by the crisis, as well as the ongoing digitalization of the veterinary practice.

Pet owners have become even closer to their companion animals during lockdown, which has helped them become more attuned to the health needs of their dogs and cats. This has driven increased spending on pets and resulted in a healthy flow of veterinary visits.

Never before has the consumer been so important to animal health businesses and veterinarians. Pet owners are adopting new buying practices for products and may be more likely to switch brands. As consumers change their habits, the industry will need to adapt the way it approaches its customers with new levels of customization and personalization.

As the consumer is becoming more powerful, the importance of veterinary knowledge has also been underlined. Many countries have witnessed a V-shaped recovery in their companion animal health markets, as demand for veterinary services remained strong.

Animal health companies lie at the intersection of consumers and vets. Many businesses worked to adopt more customer-focused projects and technologies in a bid to harness the power of the consumer but maintain the vet as a central part of the wider animal health process.

Boehringer Ingelheim Animal HealthElancoCovetrusMWI Animal HealthChewy and PetIQ all brought telemedicine tools to market as governments relaxed governance to enable more flexible veterinary examinations during the coronavirus pandemic.

Jeff Simmons – Elanco’s president and chief executive – said there are elements of the way veterinary care is currently being given under social distancing measures that could remain when lockdown conditions are eased.

He stated: “COVID-19 is going to allow a lot more people to realize they don’t have to take the traditional route with their pet to get the animal health needs they have.”

Prior to the coronavirus pandemic, around one in three US pet owners were not taking their companion animal to a vet clinic. This ratio is higher among cat owners and in international markets such as certain Asian countries. While telemedicine could help increase medicalization rates, Elanco still wants to see pet owners visiting clinics for their veterinary needs. However, Mr Simmons said the way animal drugs are purchased will certainly change in the future with more online channels being utilized.

IDEXX Laboratories outlined the broader positive trends in the companion animal health sector, which is driving long-term demand for increased diagnostic wellness testing.

E-commerce prominence

US online retailer Chewy indicated the major trend towards e-commerce for pet products during the pandemic will remain intact post-COVID-19. The firm suggested there will be a permanent switch to regular online shopping for pet food and vet medicines.

Chewy also highlighted a 50% year-on-year increase in US pet adoption during the first half of 2020. This has resulted in more companion animals per household and a higher number of households with pets, as well as increased spending per pet. The long-term test of these trends will play out if pet owners return to office-based work.

Chewy was a prime beneficiary of lockdown conditions in 2020. The company's sales were up 46% at the nine-month stage of the year. Chewy's top line has been helped by "relentless focus on execution and customer experience coupled with the positive macro trends of accelerated e-commerce migration and increased pet ownership".

Packaged Facts believes the US market for online pet products will increase by $3.9 billion this year to claim 27% of all companion animal product sales.

Elanco highlighted Bayer Animal Health’s leadership position in omni-channel sales as one of the key benefits of the megamerger. The prescience of this aspect of Bayer’s portfolio became even more prominent as 2020 wore on.

US companion animal pharmacy PetMed Express said consumer demand has recently "settled down" and, unlike many other industry experts, claimed it is hard to discern whether customers will continue their higher rate of purchasing through e-commerce channels.

Food animal sector shockwaves

It increasingly seems the 'new normal' is not a fleeting trend but a permanent readjustment to an industry that has online technology and the consumer at its heart. While this was clear in the pet sector, this predominant theme also colored the food animal segment in 2020.

A recent survey of 5,000 people in Europe showed lockdown measures sparked a change in consumer habits towards food with a greater emphasis on local produce, packaging, freshness, avoiding additives and searching for value. The major trend here is consumers demanding more information and understanding where their food comes from.

The adoption of technology, increased visibility and greater long-term sustainability efforts were critical last year to ensure consumers that gaps in the food supply chain can be overcome. In 2020, Tyson Foods acted on increasing consumer demand for sustainable meat production by adopting "the largest beef transparency program in the US".

Merck Animal Health also tapped into this theme, with acquisitions that built on its ongoing M&A strategy in the digital technology space. In particular, its purchase of IdentiGEN – a leader in DNA-based animal traceability for livestock and aquaculture – stood out as part of a wider sustainability solution. In fact, experts from Merck believe the animal health industry already has the technology needed to take sustainability to the next level at its fingertips.

Animal health has been striving for the adoption of a greater level of digital technology, monitoring and automation for several years. However, the business case for investment and M&A in this area was further boosted in 2020.

Aidan Connolly – chief executive of Irish start-up Cainthus – told IHS Markit Animal Health: "COVID-19 has accelerated the interest and adoption of technology, as people have started to settle down and think about changing how we do business and how we look after our cows.

"It is clear farmers are thinking deeply about the future of their farms. Specifically, they don't really like the idea of people coming to their farms as frequently as they have in the past. Veterinarians may turn up on a farm once a week. A nutritionist might be there once or twice a month, as well as people involved in maintenance and repairs.

”Farms are asking the question: ‘Do I really need that number of visitors?’. They are considering cameras and real-time data to support vets or nutritionists remotely and cut down the amount of visits to the farm.”

COVID-19 highlighted the gaps in the food supply chain around the world and further showed how a greater shift towards a sustainable agriculture sector will appease consumer sentiments.

The Farm Animal Investment Risk & Return (FAIRR) initiative noted how external shocks, such as COVID-19, have exposed the susceptibility of the global agricultural system. FAIRR suggested major companies are "doing far too little to measure and manage pandemic risk". Animal health companies can not only contribute their expertise to the area of zoonotic research and vaccine development but also to antibiotic over-usage, food safety and animal welfare.

Incidentally, Cargill suggested the COVID-19 crisis has helped improve the relationship between consumers and farmers. The notion of trust goes hand in hand with the theme of sustainability.

There were also signs of greater spending on alternative proteins in 2020. Data suggested sales of plant-based food in the US outpaced total food sales during the first months of the COVID-19 pandemic. In addition, towards the end of the year US firm Eat Just gained the world's first regulatory approval for cultured meat.

Impact on animal health leaders

While companies suspended and altered their financial guidance throughout 2020, most of animal health’s leaders navigated volatile market conditions to reach the end of the nine-month period with healthy top-line gains.

Many firms showed strong gains in companion animal health sales, as vet clinics around the world continued to recover following the impact of social distancing restrictions early on in the year. Businesses with product portfolios geared towards critical care categories prospered, as vets continued to treat serious diseases.

Revenues from the food animal sector improved as the year went on and the meat production segment learned to cope with social distancing restrictions, while also managing labor, safety and trade issues.

Zoetis chief executive Kristin Peck remarked: "History tells us animal health medicines, vaccines and other products remain essential even in a challenging economy. On the livestock side of the business, the need for food hasn't gone away but with restaurants and hotels closed, consumer demand has shifted to supermarkets. There's less demand for beef and dairy products, while poultry remains strong as people choose less expensive proteins."

Out of the top six players in animal health that publish nine-month sales, four had sales growth in excess of 5%. Elanco was the only business to report a decline in revenues at the nine-month stage. However, the US firm still expects to post an upturn in full-year sales.

This means it is likely all of the top 10 animal health companies will record an increase in sales during fiscal 2020. Merck Animal Health, IDEXX Laboratories and Vetoquinol were the stand-out players during the first nine months of the year.

The financial performance of the leaders is a clear indicator of the sector's durability and adaptability. Animal health has, for a long time, been described as a recession-proof sector. While this is not entirely true of any industry, animal health certainly displayed the ability to be recession-resilient in 2020.

The key to sustained top-line growth in 2021 and beyond will be maintaining a consistent level of innovation and the ability to bring new products or technologies to market.

Matthias Hofer – managing partner at Stonehaven Consulting – said there is not likely to be any lasting impact from the pandemic on R&D and manufacturing. Many R&D projects are multi-year initiatives, with COVID-19 only resulting in minor delays that can be rectified further down the line.

Zoetis told IHS Markit Animal Health its R&D strategy was unchanged during lockdown, as the firm focused on near-term deliverables such as monoclonal antibodies and poultry vector vaccines. The company placed some of its longer-term projects on a temporary hold. However, it does not expect these pauses to have a negative impact on the overarching timeline of these candidates.

The firm showed major product launches have been able to weather the pandemic to register significant sales – Simparica Trio became a blockbuster within its first nine months on the market.

Additionally, Covetrus president and chief executive Benjamin Wolin told IHS Markit Animal Health: "COVID-19 has catalyzed a component of our business in a very big way. Our prescription management platform was growing already – it grew 33% in 2019. In our most recent earnings release, we said it was growing 55% in April.

"Clearly, the veterinarian needing to have continuity with pet owners and provide a unique home delivery solution that ties into their technology platform drove compliance. That part of our business has clearly benefitted from COVID-19, like every other e-commerce business out there."