2020 was an unexpectedly positive year for veterinary services, with industry revenue increasing by mid-single digits — despite the negative impacts of the pandemic. VetSuccess, a technology provider to animal hospitals, reported revenue growth of almost 10 percent last year among its several thousand animal hospital clients.
Veterinary services have historically been highly resistant to recessions, but are these gains sustainable? With vaccines on the way, what will 2021 hold for veterinary services?
4 trends for 2021
We see four key trends in the veterinary industry for 2021:
- Continued strong demand for veterinary services, driving revenue up by high single digits to low double digits.
- Growing shortages of veterinarians, leading to increased competition for quality clinicians.
- Accelerating acquisitions of independent veterinary hospitals by corporate consolidators, further inflating valuations and earnings multiples.
- Fast growth for urgent care and ER hospitals, as GPs struggle to keep up with demand.
Trend 1: Strong growth in veterinary services
We believe the strong growth in demand for veterinary services will continue in 2021, and possibly accelerate as the year goes on. Many of the same trends that drove increased demand in the second half of 2020 appear to remain in place.
Southern Veterinary Partners, a consolidator of animal hospitals, recently noted that the share of new puppy and kitten visits at its practices increased last year and continued into January 2021.
In addition, while we wait for the positive impact of COVID-19 vaccines, we still expect a large portion of the work force to continue to work from home, meaning pet parents will be keeping a close eye on their animal companions.
We believe this greater attention to pet health is identifying potential issues and leading pet owners to call more frequently for appointments at their local vet hospital. And when pets come in, hospitals are reporting more complex cases, leading to higher average transactions.
The real kicker could come in the second half of the year, if COVID cases continue to fall, as pet parents cautiously return to travel and put their pets in boarding facilities. That part of veterinary services got killed last year — but things could improve dramatically later this year.
Put it all together, and 2021 looks like another very strong growth year for animal health. A recent survey of more than 300 veterinarians across the US by William Blair, a Wall Street firm that follows public animal health companies, found expectations for growth at just under four percent.
Trend 2: Veterinarian shortage continues
For several years now, animal hospitals have struggled to recruit veterinarians. As demand for exams has skyrocketed, the hiring gap has become even more acute.
This chart from 2019 shows the inflection point in 2016 when the number of job seekers began a massive decline — even as job ads continued to increase. At the time, the number of job ads was five times the number of job seekers.
We believe this imbalance has only increased in the last two years. Some of this has to do with the growing influence of millennials. (The American Veterinary Medical Association reported last month that millennials will become the largest cohort of veterinarians in 2021.)
Millennials (born between 1981-1996) in general focus more on work-life balance and flexibility than the generations before (GenX and Baby Boomers).
This growing hiring pressure on animal hospitals has had mixed outcomes. Some of the more progressive employers have embraced a Millennial-focused approach — leading to more successful recruiting and employee retention.
But most of the industry, unfortunately, has been slow to address these needs. The result has been a slow but steady shift of veterinarians from full- to part-time work, with some even leaving the field completely.
We believe this issue will continue to impact animal hospitals this year. Hospitals that don’t adapt, we fear, could face declining exam availability, leading to loss of clients. On the other hand, animal hospitals that figure this out will have an opportunity to add to their employee base and take market share from competitors.
Trend 3: Consolidation of animal hospitals continues
The last 10 years has seen a significant consolidation of animal hospitals by private equity backed consolidators. Brakke, a veterinary industry consulting firm, estimates that 1,000 practices were purchased in 2020 and that more than 20 percent of general practices are now owned by corporate groups.
The numbers for specialty hospitals are even more staggering — an estimated 70 percent of those businesses are now part of consolidator groups. All together, Brakke estimates that 1 of every 3 dollars spent on animal health services is now going to a corporate group.
The strong financial results for the industry continue to attract more and more outside capital. Brakke reports there are now more than 50 private equity-backed groups buying animal hospitals. This frenzy has led to increased valuations for practices, with some independent hospitals now selling for 8×-12× EBITDA.
Larger, more sophisticated hospital groups are going for high teens — even low 20s! These are huge increases from just a few years ago when private practices routinely sold for 4×-6× earnings.
What does this mean for independent animal hospitals — which by number still represent the (shrinking) majority of locations? We believe that as more money floods into corporate groups, independent hospitals left to fend for themselves will run into increasing headwinds on new client acquisition, recruiting and competition.
Corporate-backed hospitals, with their intense need to grow, will market and recruit more aggressively, further eroding the stability and strength of the independent operators.
Trend 4: Growth of urgent care and emergency services
Two of the biggest beneficiaries of the large increase in demand for pet services have been urgent care and emergency hospitals. One of the largest operators of veterinary hospitals in the US noted recently that while their general practices were up 10-12 percent in 2020, their ER revenue increased 25-30 percent.
For these hospitals, the growth was primarily driven by “intensity of medicine,” meaning doctors were providing more sophisticated — and costly — services and procedures to pet owners.
Another reason we believe urgent cares and ERs are seeing such growth is from overflow from overwhelmed general practices. With recruiting challenging and demand rising, some hospitals are booking weeks – or even months – out. For clients with more immediate needs, urgent care and ERs can provide timely — albeit more expensive — services.
Finally, some quick hits on some trending topics:
- COVID led to a huge increase in interest in telemedicine tools for animal hospitals. There are a number of companies competing in the market — TeleVet, Klara, Anipanion, Pawlicy and Petriage — just to name a few. But we remain skeptical about the actual use of these services in animal hospitals.
What’s the key blocker? Time and energy to train staff. Said the CEO of a large, private consolidator: “We have telemedicine in every hospital. But it’s not very well utilized.”
- Home delivery of food, pharmaceuticals and other products seems to be finally getting its legs. The pandemic has pushed pet owners and hospital owners to push purchases online — and begin to set up recurring shipments, according to Brakke.
2021 is shaping up to be another transformative year for vet med. Any additional trends you think we should add to our list? Drop us a note at firstname.lastname@example.org and let us know.
Michael Raphael is CEO of IndeVets.