Good morning, everyone, and welcome to the Morgan Stanley Healthcare Conference. I'm Erin Wright, Healthcare Services Analyst at Morgan Stanley. It does include the animal health sector, which we love to cover here, and have covered for some time, including PetMed Express. We're happy to have with us PetMed Express today, the CEO and President, Sandra Campos, with us. Thank you so much for coming. We really appreciate it, and we look forward to hearing kind about what's next at PetMed Express. But first, for disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you do have any questions, please reach out to your Morgan Stanley sales representative. And with that, we'll get started. So Sandra, you've come on board, relatively recently.
I guess, can you talk a little bit about how the transition has gone, kind of what your vision is in terms of the company, and we're kind of in this sort of transitional time, but also kind of what's next, what's near term and kind of longer term?
Yeah, well, first of all, thank you for having me, and thanks to those who are listening today. I was on the board of PetMed Express before I joined as a CEO, so for a year I was on the board, and one of the reasons that I actually joined the board was because this company has, for 28 years, been not only a public company, but been a very profitable company, was a pioneer in the industry as an online pet pharmacy, and I love transformations, so as we were transforming the business, even joining the board, it was something that was very intriguing to me, on top of the fact that I'm a pet owner of many pets.
I loved that and wanted to make sure that I was also in an industry that had a mission and a purpose, and my own personal passions were combined with it. So in joining the company as of the beginning of May, it was really about how do we continue this transformation? How do we really look at the business today to create relevancy within the market, which is a very large addressable market, as you know. And if we look at what's transitioned, what's happened with consumers in general, it's been very much a digital revolution. We were there digitally before, but now it's a very modernized digital revolution. It's all about personalization. It's making sure that there's a seamless journey for the customers experiencing online, that we're getting products... making the products seamless and convenient, but also that we're getting products to the customer faster.
So there's a lot that's changed in the last few years, even with buy online, pickup in store, all the buy now, pay later options from a fintech standpoint. So there's so much that has changed that has really enhanced the experience online, that there's so much more opportunity for us. So first, it was identifying what our role in this market is gonna be. What is the passion and the purpose? And it really is truly about ensuring that every pet has a happy, healthy life, has a home, that we provide the healthy essentials for pets. And with that, you know, it includes Rx, it includes OTC, and it includes food. So those are the categories in which we play.
Predominantly, the business has been very Rx-focused, as PetMeds, as a name, obviously, you know, evokes more medicine and Rx, and that's been a lot of the history of the business and the brand. And now, as we continue to expand beyond that, we have more of a balanced assortment, that we're creating more between OTC products. There's a lot of opening price point and accessible products there for customers who may not be going to the veterinarian as frequently as they were in the past. And then also food, because that's also a natural extension, especially when you talk about Rx food.
So one is really bringing in, and we've established and reestablished a C-suite organization of retail experts, making sure that we had people who understood and had been part of companies and organizations that had scaled sizably within e-commerce, and that's one that we brought on, a new CMO, a new CTO and CDO, a new COO. We have been able to do that within a few months' time. We are not only from that standpoint, really reimagining what we're doing from a technology perspective. So we've got our website that we've been focused on from a current website, but in parallel, we're actually going to be updating our website and have a new website that we're gonna be rolling forward with. But the biggest thing that we focused on in the first quarter, from May through the end of July, was consolidating our two businesses.
A year and a half ago, the company acquired PetCareRx, as you know, and with that PetCareRx acquisition, we added additional SKUs, and we needed to consolidate two businesses. So we've done that now, efficiently and effectively from an organization perspective, from a processes standpoint. We still do have two warehouses and two pharmacies in New York and in Florida, and those operate very efficiently. I call the jewel in the crown the pharmacy, because that is really incredibly important for us, and it's also very much a part of what the customer's relationship is with us. So I'll, I'll stop there for a moment because I know I just said a lot.
Yeah. As I think about the mix of the business today and how you kind of envision that evolving, historically, it was very skewed towards Rx because it was a unique channel.
Mm-hmm.
It was a lot of gray market kind of relationships, and it was you know, they had unique access, but now there's more opportunity, and more opportunity in OTC, and then you also have that natural extension in Rx food. I guess, where do you anticipate doing more in the supply arena? Do you anticipate doing more in food? Like, where does the mix kind of lie today, and where does it go kind of over time?
Yeah. So we actually believe that we continue to have an enormous opportunity in Rx. And it's not just about Rx, but it is creating an Rx balance with OTC. At the end of the day, if you think about healthy essentials for your pet, it's a combination. Supplements are OTC, but you need supplements, whether that be toppers and some of the protein and the ingredients that go into the food, or if it's supplements that might be for gut health. These are all things that are in addition to what you need from an Rx standpoint. There are medications also that you might have your pet on that then require additional types of shampoo because they might be itching. It might be a little bit more pain relief.
So things of that sort that we will continue to carry, but it also always has a little bit of that backstory in with what the Rx products are, that are, again, for whether it's early stage, which we all know flea and tick is a very big portion of this industry and this sector. So flea and tick is a continual, in my mind, it's a twelve-month-a-year evergreen product and need, and this is an area that for flea and tick, it's not just about the medication, it's also about shampoos, there's some topicals, there's other things that are really important to carry. So creating that balance, that it's not just about the Rx, but also what complements the Rx, is where we're headed.
Right. And do you think what gets you to more consistent, I guess, new customer growth over the longer term? And is it a matter of kind of the product portfolio, execution on the new website? Is it just... I mean, I'm sure it's a combination of all of the above, but what's the near-term kind of real focus in terms of getting that to more consistent new customer growth?
Thank you for asking that question because I think it is very critical for us as we look at how we're going to capture new customers. We've looked at, number one, the addressable market and who our customers are. We spent a few months really focusing in on that customer, understanding what we have, who we have, what the needs are out there. We feel very comfortable right now with knowing what we have and how we've had a very loyal customer. The loyal customers that we do have, which is still two million customers, those customers we know very well in terms of what those needs are. We have the relationship with 100,000 veterinarians that are in our portal.
We understand what they're prescribing, and we understand what the symptoms and some of the conditions are that we're addressing, from whether it's pain, flea and tick, et cetera, all those conditions that exist. So the first part is, it is a combination of efforts in terms of having the right product assortment, at the right price, at the right time, as any consumer product would be, but then also ensuring that we have and provide a seamless experience online, so that when you're going in looking for a very specific item that your veterinarian is recommending, you get also product recommendations that actually make sense with what I just described in terms of the complements to those Rx. That's something that is all about technology. That's the online experience. We are currently and actively improving that.
In addition to, as I just mentioned, we have simultaneously that we're building out a new website as well, which will be much more, engaging in general, and aligning with the partners that we have in our vendor base, those from the educational component in terms of the conditions, the symptoms, what you need to look out for, why you need certain products. So all of that is really part of what we can be to the customer, and their experience with us, is identifying, helping them identify what they have, what they need for their pets, and how we can get it to them quickly. The second part is that we are really focusing in on the pharmacy and what the pharmacy can do to expedite and help a customer.
So if you place an order for your bulldog, you've got an order with us, you're like: "Hey, I want to get this," we'll go to your veterinarian. We're having that conversation directly. Our pharmacy's contacting them in various ways and getting that prescription done for you. We're then going to remind you about your refill. We're going to make it very simple for you. And that's where we experience a lot of the feedback from the customers, is that they really love that we will take that over, and we take care of it for them. The ease of being able to do that.
And then lastly, in terms of being able to ship it to them so that they get it in an expedited manner, and we always deliver it with a special treat in the box, and with that, you know, it really ends up keeping the customer engaged. But the last part of that would be with Autoship as well, which I know we've talked about before. It's 56% of our current business. It's another area that we believe we can absolutely increase from a penetration standpoint, also retention of our customer. So Autoship across the board, that's a technology platform that we're integrating and making sure that it is robust.
On Autoship, since you mentioned it, how much of the prescription market can go on Autoship? Meaning, like, how much do you do that's, like, acute versus chronic, like flea and tick, and, like, how much is addressable there? When you say 56%, I assume that's of everything.
It's of everything, correct. It's of everything, and we don't have food on Autoship per se. Rx food can go on Autoship. We have options for even OTC products to be on Autoship.
Okay.
So it is a combination, and I would say in general, and I don't have a specific percentage, but it's probably a majority of the Rx that we can put on, especially the generics, which we have, which are individual tablets that we can just do, and that's pumping out on a regular day-to-day basis.
And then let's take a step back and talk about fundamentals in this space right now, and just the companion animal or pet market, pet prescribing market. We're seeing, like, vet office visit trends that have been under pressure now for, I want to say, 11 consecutive quarters. But some of that is due to online as well, in terms of gaining some traction. We're hearing from some of the manufacturers, even at this conference, that they're seeing, you know, increased traction across their omni-channel approach. I guess, how do you better tap into that, and then, and then where do we stand just right now from a demand perspective across the, particularly the Rx market, but just generally speaking, in terms of the consumer?
Yeah. Well, the consumer is definitely pressured. We all see that. We know that that exists out there, and we're seeing, obviously, the same thing as it relates to customers coming in. We still do about 10% of our business in our customer call center, so we actually have the ability to hear from customers, and I've spent quite a bit of time listening to customers interact with us as well and reading the commentary, even if it's the Q&A online. And there is, first and foremost, they do want to know: Is there a promotion? Is there a coupon? Secondly, do I really have to have this prescription every month or every three months? What can I do that's outside of that? How can I stretch it out a little bit further?
Those questions are coming, so the consumer is definitely pressured, and now it's really about making sure that we provide them options at various price points. Even Zoetis, which is obviously, you know, one of the, the top pharma companies for us as well, had on Simparica Trio, authorized that we provide the opportunity for customers to have one individual tablet instead of having to have three or six. So that actually gave a lot of flexibility and optionality to the consumer. So I think if we do more of that, that's also gonna be very beneficial to continue to add growth and help customers at the same time.
Okay, that's interesting, and an interesting kind of dynamic in terms of the flexibility there with your pharma customers. How are the relationships with the pharma customers right now? It's been an evolving process 'cause, you know, back when I started covering this company many years ago, it was nonexistent in terms of the relationship, but that obviously changed.
Do you mean with the vendors?
Yes.
The pharma companies?
the vendors, the manufacturers, yeah. And now that's obviously dramatically evolved. They're working directly with you.
Correct.
You know, how much are you working with distribution versus the actually direct with manufacturers, and how has the relationship kind of evolved?
The majority of our business is done directly with the manufacturers. We do have Boehringer who, BI, who actually has PetIQ as their distributor in the U.S. They're a significant part of our business, so we deal with PetIQ for that business as well, and they're continuing to expand and grow with us. But for the most part, we have a direct relationship with these vendors, and it's continuing to grow as we continue to grow and really enhance and focus in on those businesses and the new products that they have, and get them really working with us to be able to educate the customer.
Okay, and then pricing across the board in terms of those price increases at the vet clinic, at diagnostics, at, you know, the pharma companies. What are you seeing in terms of price increases across the... 'Cause this is generally a MAP pricing environment when it comes to prescription. OTC is a little bit different, but what are you seeing in terms of price increases?
Yeah, so we look at our average unit retail, and we really haven't increased our average unit retail, even though you look outside and, yes, there's been absolute increases across the board. We haven't. We do obviously honor MAP pricing, so it is very much that same environment, and when the vendors give us the ability to do coupons and create more traction, we do that, and as well, we will honor anything that they require from us. But as it relates to, you know, when we think about how the customer is evolving and what the needs are there, we need to have more of the, I call it the good, better, best. So it's accessible price points to the mid-price points to the higher price point. And that goes into whether it's one tablet, three tablets, six tablets, or different sizes.
We are broadening our assortment to be able to carry more opening price point that's more accessible for the customer.
Switching gears here a little bit, but you've had various different strategies, like whether it was Vetster or Pumpkin, and then you did the PetRx transaction. I guess, where would your focus be? Obviously, you were part of the company for some of those, but on the board and now in sort of the C-suite, you know, where does your interest lie?
Those actually all happened before I joined the board.
Okay.
So it was a little bit longer. I think it's been about a year and a half or a little bit longer on the PetCareRx, Pumpkin, and Vetster situation. You know, Vetster is a telehealth platform, and we do believe in the ecosystem that is everything that the customer needs and the end user needs for their pet. And we do believe, even on a personal level, in insurance. We believe that that absolutely will save customers money in the long run. While it is a slower adoption in this industry right now, and I think we're about hovering around 5% of customers, pet owners, who actually have insurance for their pets, it is pretty dramatic what it can do in terms of savings.
We are trying to educate customers, and we do have the relationship from an insurance standpoint so that we can actually provide and facilitate a way for customers to actually gain access to insurance. On the telehealth side, there's six states now that Vetster is working with, that have actually authorized for telehealth companies to actually prescribe medications. In those six states, they're continuing to increase. That's been a very big increase for us and a triple-digit increase year-over-year, but that's a slow ramp as well. We do believe that in these long term, because it is all about having a full ecosystem and being able to have various touch points for the end user, so that if you need something that moment... We know also that there's been a constriction in terms of the number of veterinarians out there.
They're not open full week. They might not be open every weekend. Inevitably, my animals always get sick on a weekend or really late at night, and then you have to have something that's available. So we do believe that there is a need to continue to really focus on enhancing the visibility for telehealth and the visibility for insurance, because that does help the end user.
Okay. And one area that I think you drove home kind of immediately when you came on board was kind of managing costs, managing marketing spend, or making it more efficient. Can you talk about your strategy, the latest there, and what you've accomplished thus far, but also kind of the plans ahead?
Absolutely. So one, just PetCareRx, going back to that acquisition, there were two distinctive and different companies, and what, my first initiative that I raised to everyone in the beginning was we needed to consolidate the company. So we did. We've already done that successfully. The companies are integrated. From an organization standpoint, we no longer are bidding against each other from a marketing standpoint. We are. You know, the products, we do have two separate ERPs currently, but those will eventually, in the next six months or so, be consolidated. And as it relates to cost savings, we did implement $5.1 million worth of savings on an annualized basis, and that is something that we'll start seeing immediately because that's going, that has already gone into effect, essentially.
So that reduced in terms of looking at optimizing and synergizing, whether it was technology providers, marketing agencies, a whole variety of different functions that exist within the organizations. We looked at that to consolidate, ensure that we were the most efficient possible, and also that was a big part of our reduction.
Should we see a continuing kind of, I guess, reduced kind of marketing expenses, or how do we think about that trending sort of going forward?
Yeah. So on the marketing side, what we've actually looked at is we've looked at as a percent to our total business, so first and foremost, we said in the first quarter of my being in the company, we really need to focus on retaining the customer first and not really spending on acquiring, while we were understanding who the customer is, while we were focusing in on what type of content we needed and how we were going to segment the customer base, so in doing that, we really took a big reduction in our spend, but also we looked at just retaining customers, so that's what we focused on first. We then said we're going to go into, and that was 100% retention focus.
And then in August, mid-August, we started to implement the acquisition marketing strategies, and now fully in September, we're moving forward into 60% being acquisition, 40% being retention. So those efforts are starting now, and they're going to be ongoing. So we'll continue to really focus in on how we segment the customers, and that is by lifestyle more than anything else. So as a new pet owner or as an existing pet owner, depending on your household income, what you're focused on in terms of veterinary visits, where you're located, all the conditions that you might need. It's a warming climate. There's a lot. Ticks live a lot longer these days because of that warming climate. So there's a lot of those areas that we're really focusing on from really hyper segmentation and personalization for the customer.
This is leveraging kind of the data that you even have today, right, and better kind of engaging and monetizing kind of what you have. I guess, where are you at in terms of aggregating that, and can you leverage things like AI, for instance, across your platform?
The good news is we have 28 years of history. We have a lot of data there, and between both companies, we, as I mentioned before, we have 100,000 veterinarians in our portal. We have 2 million active customers. We've got a membership model with the PCRXP, so that has a really high lifetime value customer base. We do have a lot of data, and we're taking those insights, regardless of where they live, how many pets they have in their household. We're taking that data, and it's really informing our decisions as it relates to products that work, products that don't work. What, where are we going to stand for? We're not into bedding and crates and all of that, how, you know, hard goods. That's not where we're focusing, and that's not what our best foot forward is.
The data and insights provide a little bit more of that for us. We also have, as I mentioned before, a very robust customer call center, so we get a lot of data from them. On the AI front, we've just implemented. The first thing that we did from a consolidation purpose was consolidating our call center technology, and that technology now has a lot of AI tools within it. We're really excited to be able to implement that because it will not only help. It's not taking away from our customer call center in terms of what their jobs are. It's actually enhancing the education and enhancing the tools so we can take notes and understand what customers are saying, and then get that data and be able to work with that to inform our decisions.
We talked a little bit about Autoship, but can you talk about the nature of kind of the Autoship customer, getting them on board? And then, you know, what does it look like in terms of acquisition cost or the relative benefits associated with kind of the Autoship program?
Yeah, so as I mentioned, 56% of our customers are currently on Autoship, and that is fully Autoship orders for the Autoship products. It's not just any other product that they, that they purchase from us. So one is, in terms of the acquisition for the customers, we do carry a very competitive range of products, but we also have a competitive discount for any new Autoship customers. The vendors have actually come on board with what those are, and so we have a very large incentive for new Autoship customers.
Once we have them in, what we've been implementing is a lot more discussion with them about the benefits of what they have, early refill reminders, ensuring that we're giving them the optionality of what they need in terms of do they need it every four weeks, six weeks, eight weeks, et cetera. We're giving more self-service options online as well, so that they can actually do what they need to do with their shipments, whether it's reduce them, increase them, put a pause on them, et cetera. That's been a really big effective part because it seems a little simple, but customers were telling us that they didn't have enough options on Autoship to be able to make some changes. We've implemented that already as well.
So we, from a customer standpoint, it is our highest lifetime value when we're retaining them on autoship. And within three years' time, as we look at those customers, they're the highest lifetime value that we have. As it relates to, you know, any additional autoship, we continue to add more products on autoship as well, and we're really focusing in on the investment of the autoship technology to ensure that that's a tool that customers can use safely, effectively, and be able to make the changes that they need.
Okay. Okay, that's great. And then in terms of supply chain dynamics, I mean, have you experienced any sort of disruption in the market? I mean, we saw some of that at various time points during the history, kind of, of PetMed Express, but I think the supply chain is a little bit more efficient these days. Can you talk a little bit about... Is there anything to call out on that front?
Yeah, we have not seen any disruption. You know, my former experience, I've had to import things from all over the world, and we don't have to do that here. So we're actually dealing with domestic suppliers, and we've not really seen any type of disruption, I would say, in the, for the most part. There have been a couple of times where some large food brands haven't had as much product, per se, that we would have wanted, but overall, we have not seen, and again, the basis of our business being Rx driven, we've not seen any disruption there.
... And when, you know, it, it's obviously helpful when there's kind of multiple players in certain categories, where there's new innovation coming online, particularly that would go through the online channel. For instance, like a competitor to Apoquel, and other competitors kind of down the road. I guess, you know, how do we think about, you know, more innovation in the space helping to drive kind of overall, whether it's autoship, whether it's just overall traction and new customers? But how do you better engage in that? Is it a matter of engaging with the manufacturer better? Is it the veterinarian? Is it kind of both, or how do you think about that?
We do have a veterinary advisory board, and they're really starting to play a very important role with us, that we are engaging with them, also asking them: What are they seeing? What are the innovations? What are the manufacturers they're working with? What are they really prescribing more? Because we need to be offering customers what the veterinarians are prescribing, obviously. So if we look at that, we want to understand from them. So they're giving us back the details that are really helpful for us. When we talk about conditions, we're talking about seasonality, whether it's allergies, joint, mobility, eye vision, et cetera.
These are some very hot topics today, and so they're actually being very helpful with us in identifying some of the, you know, A, chronic issues, when we have chronic, B, in terms of what customers can do from a preventative standpoint, and then, C, really helping to tell us what are those manufacturers doing, who's doing what, what are they seeing that's actually performing better? They do have differences. There's five of them on the board. They do see some different things, and we're able to hear that across the both from dogs, cats, and horses as well, which are the three different animals that we really focus on within the company. Predominantly dog and cat right now. Yep.
And then, in terms of the different models that are out there, you know, you have Chewy that's gone a bunch of different routes, like you're just, you know, pure play, kind of, e-commerce channel, but also working with the vets and sharing some of the economics. And then you have Vets First Choice with Covetrus, and you have, also VetSource with Mars. And how do you think about, you know, the different models that are out there in terms of what can work and where does kind of PetMed Express fit into that?
So first, I think we have a lot of low-hanging fruit. I know it's an overused word, but we do have a lot of opportunities everywhere. So there's certain things that I don't have an answer for today. That would be one, in terms of what we're doing with the veterinarians. We do have a very dynamic veterinary advisory board that I was mentioning just now. They are very important to our business. We want to develop more relationships with them. As I mentioned, we have one hundred thousand of them in our portal, but we need to be able to have more of the, I would say, deeper engagement with them as well.
I don't have a full answer of how we're going to compete in that space and what we're going to do, whether it's like Chewy or Covetrus or anybody else, but we do know that we're really identifying the pain points that we've had on our vet portal. We're creating better ways for them to engage with us, for them to actually approve the prescriptions from the customers that are asking for them to be sent to PetMeds or PetCareRx, and that, we believe, is going to help us as well in the near term, and then long term, we'll identify other opportunities.
Okay. You've made a lot of management changes, and brought on a lot of people into the C-suite. I guess what's next? What else needs to be done in terms of bringing people on board and kind of, and other kind of organizational-type changes that you're making?
I would say from a C-suite standpoint, we, our CFO-
Yeah
... search, as you know, has been an ongoing one, but we will be announcing that one soon. And so that will be a big one that will round out our C-suite. We are a very strong group. It's a very cohesive group, and it's one that I'm very excited about because I know that we can do a lot more with this very strong, cohesive group of people that are really in it to win it. And, as far as that goes, you know, right now, we're really bringing in the second tier of managers as well, to really look at the organization, ensure that we have excellence across all levels, that we're being really efficient, and that not only having some pet sector expertise within the company, but also having the retail and e-commerce expertise as well.
Okay. And then, hopefully, you know, we'll see in the next quarter, like some sort of, you know, progress on everything that you're doing, because it sounds very exciting. But even a year from now, what will we be talking about, and what do you hope kind of people will take away from what's transpired and what you've done thus far since coming on board?
Yeah. Oh, a year from now, it's gonna be very exciting. No, a year from now, I certainly hope that we're going to be talking about all the different verticals that we're going to play into because we have private label that I've mentioned before. We're really going to be putting a lot more into our private label program, and we are also working with partners from a brick-and-mortar standpoint so that we're a back-end pharmacy for those. And that's another exciting element because we want to be where the customers are. We want to be where the pet parents are, and sometimes they're in stores, and sometimes they're online, so we want to be in those locations and obviously veterinary offices as well.
Then, you know, other channels, marketplaces and Amazon type, so we were going to talk about those in a year, and I'd say the other vertical would be really as we identify the equine opportunity. I have eight horses myself, but going more deeper into the equine space, we're going to be talking about that as well.
One thing I do want to ask, and I forgot to ask it earlier, was on the generics market in this space. It's kind of played an interesting role because you have a veterinarian. It's not automatic substitution of generics. How do you manage that sort of friction in terms of prescribing patterns, and that can represent a, you know, opportunity for you in terms of private label. Where are you at now in your efforts there?
We have some. We have had some private label that we've had over the years, but we're really identifying just now because we're bringing in the right people and the right talent internally as well. We're identifying what those options are. We're identifying the best options to be able to go into, that are really going to be meaningful to our customer, because we're not just going to create products for the sake of creating products, but we're going to really create the ones that we know there's a demand for within our existing pool of customers, but also seeing it from the external side, from the market. So those are areas that we have that's in the works today, and we currently, as I mentioned, already have some products. It's less than 5% of our current existing business.
It's very small, but we will absolutely increase to that in the future, in the near future.
When you do see generics, it's not like the human market, where then pricing goes to zero, the economics aren't really there. I mean, you can still price it, still at a discount, obviously, to the brand, but still see some favorable economics there.
Yeah, the margins are much, much better, obviously.
Yeah.
So that's a big part of it, but we still have to establish. And, you know, for PetMeds, having a twenty-eight-year credible history within the sector, we believe that we have not only the credibility to be able to do this and do it well, but also with the help of our veterinary advisory board, that we'll also have the credibility from the veterinarians and the medical practice that, that can help us in guiding us in the right direction.
Since we have two minutes here, if anyone has any questions in the audience, feel free to, feel free to reach out. Okay. All right. Thank you so much.
Thank you.
I appreciate the time.
Thanks so much, Erin.