|Shares Out. (in M):||114||P/E||0||0|
|Market Cap (in $M):||2,846||P/FCF||0||0|
|Net Debt (in $M):||1,130||EBIT||0||0|
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Covetrus (CVET) is a mispriced special situation following the completion on 2/7/19 of the carve-out from Henry Schein (HSIC) and spinoff to shareholders of the Henry Schein Animal Health business, which merged with Vets First Choice in a Reverse Morris Trust transaction, with the resulting company named Covetrus, a pure-play animal health company. Henry Schein shareholders own ~63% of CVET, and Vets First Choice shareholders own ~37%. I believe the mispricing is caused by several temporary issues, and a few underappreciated longer-term attributes.
Concerns / issues leading to investor concern and stock drop:
Underappreciated positive attributes overshadowed by the concerns above:
--The Chairman of Covetrus, David E. Shaw, was Founder / former CEO of Idexx Laboratories (IDXX: $23 billion market cap) and Founder / former CEO of Ikaria Pharmaceuticals (acquired by
Mallinckrodt for $2.3 billion). He was Co-Founder and Chairman of Vets First Choice.
--President and CEO of Covetrus, Benjamin Shaw (David’s son), was President, CEO and Co-Founder of Vets First Choice.
Clayton, Dubilier & Rice (CD&R) invested in Vets First Choice in July 2015 ($52m) and again in July 2017 along with Hillhouse Capital, Viking Global, Wellington, Rock Springs, and Sequoia Heritage ($223m), and CD&R is now the largest CVET shareholder with 10.13% of the company, and along with Hillhouse Capital and Viking Global, their combined stake is almost 18%. Morgan Stanley owns 10.09%. S&P added Covetrus to the S&P MidCap 400 as of the start of trading on Feb. 11, replacing Dun & Bradstreet (DNB) in the index.
Following the transaction, directors and executive officers own 3.6% of the business, Ben Shaw owns 1.1%, and David Shaw owns 1.9%.
Covetrus is a global animal-health technology and services company that enables veterinary practices to drive improved health and financial outcomes. Following the merger, Covetrus will continue HSIC's animal health business, which offers several veterinary practice management software systems and leverages its animal health distribution business in sales and service for the software. Covetrus is headquartered in Portland, Maine, and has >5,000 employees in ~25 countries and ~100,000 customers in over 100 countries.
Henry Schein Animal Health (HSAH) is the world's largest and only global supply chain provider of animal health products and related services, with market-leading positions in North America, Europe, and Australia/New Zealand. HSAH serves animal health practices and clinics with branded and generic pharmaceuticals, surgical and consumable products and equipment (~14,000 SKUs). HSAH active customers include ~90% of veterinarians in the U.S., and 70% of veterinarians in Europe and Australia/New Zealand. In addition, >50% of U.S. Animal Health practices (~16k) currently utilize Henry Schein's Practice Information Management Systems (PIMS) to drive office productivity and customer engagement, and worldwide, ~20k customers use PIMS—8 practice management solutions (on-premise and cloud—7.5% of installed base is cloud-delivered as of Q1’19) for appointment management, prescription management, inventory management, financial and clinical records, electronic medical records, patient treatment history, billing, accounts receivable analyses and management, and electronic claims processing.
Vets First Choice (VFC) is a leading provider of prescription management, pharmacy services, marketing solutions, and practice analytics for veterinary practice customers. It enables veterinary customers to drive better prescription compliance, strengthen client relationships, and better compete with retail competition. The veterinary industry has responded enthusiastically to the solution due to the threat of market share cannibalization by online pharmacies. VFC was launched by a team including the founder of veterinary testing company Idexx Laboratories (IDXX), and provides vets with a private-label website where pet owners can fill prescriptions. The vets take a percentage of the revenue, replacing some prescription drug revenue that has transitioned to retailers and online pet pharmacies. VFC allows veterinarians to increase revenue (through better proactive prescription management) and reduce COGS (through HSIC sourcing) simultaneously. Adoption of VFC prescription management offers a predictable ramp-up period as customers create new active recommendations, prescribe medications, and drive client reorder activity, and it builds with refill, renewal, and auto-ship services, providing a good visibility into the ramp of utilization and revenue acceleration for these accounts.
VFC has ~8,000 (end of Q1’19) veterinary practices on its prescription management platform, and expects to deliver >3,000 enrollments in N. America in 2019, exiting the year with >10,000 clinics on its platform. There are ~30,000 veterinary practices in the U.S. and Canada. When Ben Shaw was asked recently about growing penetration of the platform from ~33% to higher levels, “Is this the type of platform offering that you can see surpassing 80% or 90% penetration longer term both in North America and worldwide?” he replied simply, “Yes.”
The sales force from HSIC (>1,200 sales professionals and sales in >100 countries) can now sell VFC into the rest of its ~100,000 customer installed base of supply chain customers. VFC offers a pay-for-performance model, with no upfront costs for the vet practice, which reduces hesitation for vets to try the platform:
Medical compliance for veterinary prescriptions, including preventative medications, remains low at a time when the national incidence of flea, tick and heartworm disease is on the rise. This underscores the need to transform how veterinarians manage and engage their pet-owner clients to help drive greater preventative awareness and improve medication adherence. Covetrus prescription management technology has demonstrated the ability to drive a 2-4x improvement in compliance for prescriptions. Streamlining this workflow through the tighter integration with the practice management system can help eliminate administrative burden, drive greater client engagement and improve health and financial outcomes.
CVET’s services result in significantly better prescription compliance, reduced inventory, increased vet practice revenue, and improved practice profitability: