PetMed Express, Inc.

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PetMed Express, Inc.

1441 SW 29th Avenue
Pompano Beach, Florida 33069
U.S.A
Telephone: (954) 979-5995
Toll Free: (800) 738-6337
Fax: (954) 971-0544
Web site: http://www.1800petmeds.com

Public Company
Incorporated: 1996
Employees: 180
Sales: $108.4 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: PETS
NAIC: 453910 Pet and Pet Supplies Stores; 454111 Electronic Shipping; 454113 Mail-Order Houses

PetMed Express, Inc., the nation's largest pet pharmacy, markets discounted prescription and non-prescription pet medications, health and nutritional supplements, and accessories for dogs, cats, and horses through its catalog and postcards, through customer service representatives at its toll free number, and via the Internet. Prescription medications include name-brand as well as generic heartworm treatments, thyroid and arthritis medications, antibiotics, and other specialty medications. Non-prescription items, which include flea and tick control products, bone and joint care products, vitamins and supplements, and hygiene products, account for 70 percent of sales. The company purchases its products at wholesale prices and ships directly to customers.

1996–1998: RAPID GROWTH LEADS TO TROUBLE WITH THE VETERINARY COMMUNITY

In December 1996, Dr. Marc Puleo, an anesthesiologist, founded PetMed Express, Inc. It was not originally Puleo's intention to enter the world of pet pharmaceuticals; however, with Americans spending more on companion animals overall, Puleo reasoned they would welcome the convenience and discount of ordering medications and products for their animals online. "I was looking to do mail-order marketing of human medications, but Merck was already heavily into that. So I decided to try mail-order pet medicines and assorted pet accessories," Puleo said in a 1998 Miami Herald article.

PetMed Express incorporated in July 1996 and grew rapidly by word of mouth. By 1997, it had sales of $600,000, and in fiscal 1998, the company sold $2.8 million worth of pet drugs and other products at a discount of up to 40 percent off veterinarians' office prices. The company, then headquartered in Fort Lauderdale, employed about 70 people, including two on-staff veterinarians, and had a 76-page catalog. Pet-Med's first catalogs sold numerous antibiotics, wormers, fungicides, vaccines for dog diseases, such as parvovirus, parainfluenza, hepatitis, and distemper, and for cat illnesses, such as feline leukemia and distemper, as well as leashes, shampoos, and toys.

It was not long, though, before PetMed was in trouble with veterinarians, who did not like the company's methods of doing business. Some criticized the way the company obtained its pharmaceutical merchandise, claiming that it purchased drugs from unethical vets, who ordered more than their practice needed from unethical distributors. Others disliked the way PetMed marketed its services. PetMed, like other mail-order companies, obtained public records—in one case in Florida, rabies vaccination lists—to target pet owners with its direct mail ads. In April 1997, Florida state representative Bob Swindler, a veterinarian himself, put forward a measure to exempt rabies lists from public disclosure; instead, records could be obtained only one at a time.

Swindler and other veterinarians across the state insisted that the measure preserved individual privacy and that PetMed's method of obtaining the lists was unscrupulous. Puleo countered in a 1997 St. Petersburg Times article, attributing such criticism of the company to the self-interest of veterinarians who "don't want … us taking their customers from them." His solution to the conflict was simple: "All they need to do is lower their prices." Veterinarians in private practice typically drew about a quarter of their yearly revenues from the prescriptions they wrote and filled.

The company's methods faced other challenges as well. PetMed was required by law to have a prescription on hand any time it sold a drug to a consumer. However, it was unclear whether the prescription could be faxed or called in to PetMed. According to PetMed, in a 2003 DVM article, once contacted by a customer wishing to order from the catalog, "[o]ur process is we fax the veterinarian first, and if we don't hear from them, we call. We also call the client."

PetMed insisted that "[b]y not responding or authorizing the prescription for us, veterinarians are limiting consumers' freedom of choice." Problems ensued when the company went ahead anyway and filled some of these prescriptions while awaiting authorization. During 1998, as mail-order pet pharmacies as a group came under the scrutiny of the veterinary community, the Florida Pharmacy Board received six complaints against PetMed alleging that the company had issued medications without a prescription from a vet.

The American Veterinary Distributors Association also filed a complaint with the Center for Veterinary Medicine, a division of the U.S. Food and Drug Administration, claiming that PetMed Express was selling prescription drugs without the consent of a veterinarian. At issue here were the company's own scripting veterinarians, who prescribed drugs for animals they had never seen. These professionals were not licensed to prescribe in the state of Florida, which insisted that there be a veterinarian-client relationship before a prescription could be filled.

Following several months of controversy and pending an FDA investigation of its practices, PetMed recognized that it had to rebuild its image with some vets. It began "looking to maintain a peaceful relationship with veterinarians," according to Puleo in a 1998 DVM article. "We're looking to provide a service to our customers and the veterinary community…. [W]e think we can help improve both the veterinary field and actually help increase revenue back to the veterinarian's office." More than dispensing medicines, the company's "new mission is to get pets to the vet." The plan was to encourage customers to visit a vet on a regular basis by offering an additional discount on merchandise purchased after a veterinary office visit and by setting up a veterinary referral network.

1999–2002: NEW LEADERSHIP AND REPEATED SANCTIONS

In August 1999, after several months of discussion, the Florida Pharmacy Board settled with the company on 56 complaints. The Board required that PetMed pay a $30,000 fine for costs incurred during its investigation in addition to $8,000 for the two-year investigation. PetMed had to submit quarterly reports to the Pharmacy Board for the next two years, and Puleo and his pharmacy manager had to take 12 hours of continuing education on pharmacy laws and regulations. More generally, PetMed had to adhere to the Board's plan of action for the company, obey state laws relating to the practice of pharmacy, and agree to semiannual inspections for two years. PetMed did not have to admit to any wrongdoing.

KEY DATES

1996:: Dr. Marc Puleo incorporates PetMed Express, Inc.
1998:: The American Veterinary Distributors Association files a complaint against PetMed with the Center for Veterinary Medicine.
1999:: The Florida Pharmaceutical Board settles on 56 complaints against PetMed.
2000:: The company goes public; Tricon Holdings LLC invests in the company.
2001:: Menderes Akdag becomes CEO.

The following year, 2000, the company went public. However, there was trouble again when the EPA issued a "stop sales order" to PetMed and several pet stores to which it had sold veterinary-distributed flea control products. The boxes for the widely used products had been purchased outside of the United States and thus gave their dosages in metric, giving rise to the possibility of overdose. Novartis, maker of the misbranded product, also sued PetMed. PetMed and the EPA settled in 2001, with PetMed Express paying a penalty of $100,000 and agreeing to properly dispose of mislabeled products. In 2002, PetMed reached a confidential settlement on their suit.

In the meantime, significant changes were taking place within the company. In March 2001, Puleo stepped down as executive director, though he stayed on as president; Menderes Akdag, former chief executive and president of Lens Express, replaced him. The company also installed state-of-the-art software to facilitate online ordering. It stopped selling about 5,000 non-drug items to focus on the 600 remaining medicine-related products in its inventory. Finally, it began to take a more aggressive stance toward its detractors.

In 2001, a complaint form appeared on PetMed's web site. The letter was intended for customers whose veterinarian withheld a prescription to PetMed for non-medical reasons or charged a client to write out the prescription. According to the letter, which appeared in an August 2003 issue of DVM, "[i]n some instances, we find that veterinarians withhold prescription authorization because they want to sell the medication themselves. This restricts freedom of choice and leads to higher prices for consumers and requires the inconvenience of an additional trip to the veterinarian's office." The company offered to e-mail these complaint forms to the federal Consumer Protection Agency, state veterinary regulatory agencies, and state consumer protection agencies.

Late in 2001, the company was once again embroiled in trouble with the Florida Pharmaceutical Board, which went public to say that the company's pharmaceutical license was in jeopardy because it had failed to heed its first warning. Also at issue were fraud charges for PetMed's failure to announce that a second online pharmacy, Savemax, ran out of its offices. In the end, the Board again levied penalties against PetMed ($30,000 in investigative costs and $40,000 in fines) and mandated unannounced state inspections and a three-year probation. Several employees, including Akdag, were ordered to complete training in pharmacy laws.

Although criticized for being a second slap on the wrist, Florida's 2002 settlement was in some ways a benchmark because it set the stage for other states to take action against PetMed. The Missouri Board of Pharmacy put PetMed on probation in 2001 for violating six state statutes, including a law that required nonresident pharmacies to obtain an in-state license to sell prescription drugs in the state; the Board ruled that it could not use its alternative veterinarian program to fill prescriptions in the state. This probation was eventually extended to 2007. In 2002, Missouri issued a temporary restraining order against PetMed for not heeding its warning. The Alabama Board of Pharmacy put the company on a five-year probation, terminated its alternative vet program in the state, and demanded $8,000 in fines in 2001. Utah denied the company's application to renew its out-of-state mail-order license; although it renewed the license when PetMed objected. The Texas State Board of Pharmacy and State Board of Veterinary Medical Examiners Officials began investigating their own case against PetMed in 2002 and alleged in 2004 that PetMed had sold prescription drugs illegally to Texas consumers.

2003–2006: A HOT GROWTH COMPANY FACES CLASS-ACTION SUITS

By 2003, spending on pets in the United States had reached about $3 billion, and veterinary medicine was expanding to meet demand. Pain medications alone topped $150 million, having increased 275 percent in the preceding six years. A survey by the American Animal Hospital Association found that a majority of pet owners said they would go to great lengths to improve the quality of their pet's life, even for a short period of time. Revenues for PetMed increased 71 percent in 2003 to reach $94 million. This figure represented a ninefold increase in sales in four years and 40 percent of the market for pet medications sold via mail or the Internet. Fifty-five percent of revenues came from repeat customers.

In 2004, Business Week named PetMed to its annual list of 100 Hot Growth Companies based on the previous three years' revenues and income. During this period, sales had increased 102.2 percent, profits 173.9 percent, and the company had achieved a 51.5 percent average return on capital. In 2004 alone, sales increased 70 percent. Also in 2004, PetMed reached an agreement with the Hartville Group, Inc., one of the leading pet insurance companies, to allow Hartville to market its Healthy Bark & Purr to PetMed Express customers via the web site.

However, 2004 brought six class-action securities lawsuits against PetMed. Shareholders sued, after the company's share price dropped about a third. PetMed claimed that this drop was due to a decline in new customers after the company bought less television advertising time. The suits claimed that the company had delayed disclosing long time veterinarian dissension that hampered sales growth so that company insiders and executives could cash in shares worth $65 million. In June 2004, Puleo sold off a $10 million stake in the company and Tricon Holdings LLC, which had invested in 2000, followed suit in 2005, bringing its holdings down to 21 percent from 70 percent earlier.

Throughout all of its difficulties, PetMed insisted that it had reformed and was in complete compliance with all state and federal regulations. Akdag voiced optimism about PetMed's future, stating in a 2004 South Florida Sun-Sentinel article that it was just a matter of time before consumers turned to discount companies, such as PetMed. The company, which had about a 3 percent share of the $3 billion annual market in pet medicines, and made most of its revenues selling treatments for flea and tick control, heartworm, and bone and joint care, saw its biggest opportunity in the prescription end of its business. Even former detractors seemed willing to lend qualified support to the company. "PetMed got off to a bad start," said Donald Schaefer, executive director of the Florida Veterinary Medical Association, in the Sun-Sentinel article. "The good news is that the company has made a legitimate effort to respond to the requirements of the Board of Pharmacy."

PRINCIPAL SUBSIDIARIES

Southeastern Veterinary Exports Inc.; First Image Marketing Inc.

PRINCIPAL COMPETITORS

Drs. Foster & Smith; KV Vet; PetCareRx; Medical Management International, Inc.; Pet Valu; Petco Animal Supplies, Inc.; PETsMART, Inc.; Wal-Mart Stores, Inc.