The ASX small caps looking to capitalise on post-COVID trends in animal health
Health & Biotech
Health & Biotech
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Among the different investment narratives that have arisen in the wake of COVID-19, animal health has tracked under the radar.
Along with being big (industry research indicates it was worth around $67bn in 2019), the sector has also found tailwinds in post-COVID trends around animal companionship.
For veterinary clinic operator Apiam (ASX:AHX), anecdotal trends have been evident as the company builds out the service offering for its regional vet network.
“I think if you look at impact of lockdowns and the associated effects of mental health, there’s been a move towards companionship,” CEO Dr Chris Richards said.
“So we’re seeing a trend towards dogs being more a part of the family, rather than just being a pet.”
That view was shared by veterinarian Dr Shannon Coyne, who heads up Apiam’s vet training program.
Speaking with Stockhead, Coyne flagged a shift in consumer behaviour flowing through to a pick-up in veterinary services activity.
“Some of the breeders I speak to are saying they’ve got clients who want a puppy. They’re not specific about breeds, they just want to get on the waiting list so they can get a dog in the next six months.”
“So I think the days of low-cost pets are long gone. People are regularly paying thousands for a mixed breed dog and that flows through to what we’re providing.”
For Layton Mills, CEO of animal health company Cannpal (ASX:CP1), the tailwind has been more noticeable on the product distribution side amid the global boom in ecommerce.
Mills cited data from the US market, where CP1 has established a distribution channel for one of its core products through Amazon.
“What I’ve seen in the market is that the CEOs of the largest animal health companies globally are talking about importance of having an omnichannel strategy now,” Mills said.
He added that a key feature of ecommerce for animal health products is that the post-COVID rise in sales is being driven by a lot of first-time shoppers.
“While the online market had a strong trajectory before COVID – now what we’re seeing is an acceleration of that adoption. And that’s new customers getting over the barrier of starting to buy pet products online.”
“Which in turn means animal health companies need to adapt quickly to catch up with that increased rate of online growth.”
While demand for animal health and veterinary services is picking up across regional areas, Apiam said the focus now is on building out its vet network to meet that demand.
“In this market if we assess an animal and recommend an ultrasound, customers are saying ‘I’m not going to drive 300km to a metro area to get it done’,” Coyne said
“These days, for every clinic in a regional town the expectation is they provide hospital level services. That’s what we’re rolling out and the demand is there.”
Richards said the company’s efforts to meet that demand include the introduction of CT scan machines at clinics in Bendigo and Gippsland, as well as an extended rollout of diagnostic imaging machines.
He said those moves tie in with Apiam’s broader strategy — deploying the necessary capital expenditure to leave it capable of scaling up where necessary to meet demand.
“At the moment Apiam’s invested a fair bit into the hardware side. For example if you take diagnostic ultrasounds – that’s a standard of care that’s evolving but we’ve already got the hardware in place,” Coyne said.
“Regional clients are demanding an improved quality of services, and they’re happy to pay for it.
“And that’s what attracted me to Apiam in the first place – that it’s a company focused on moving into those areas to meet that demand.”
For Cannpal, Mills said the partnership with Amazon offers the company good exposure to the ecommerce boom, as it moves towards commercialisation for Dermacann – its cannabidiol (CBD) nutraceutical supplement for pets.
The deal is a by-product of its licensing agreement with the CSIRO back in January, to commercialise their patented MicroMAX technology in the field of Animal Therapeutics.
MicroMAX works as an encapsulation technology to protect treatment oils from oxidation, thus expanding their application base.
“Even going back two years ago, if we’d announced that we’d launched a product through Amazon, people would question the strategy,” Mills said.
“But in the US, Amazon is now a market leading distribution channel for pet supplements, outselling some of the leading retailers.
“As a partner they also take care of the whole cycle through fulfillment, distribution and sales returns – all the infrastructure required if you were selling a product through retail.”
“But instead of paying a distributor and a retailer a margin of 40/50 per cent each, you can access the market with a much lower cost of sales.
“And with the capability we have with the MicroMAX technology, we can introduce new products into that channel very easily as we grow.”
Mills said the company has maintained a focus on costs in 2020, to ensure a lengthier cash runway as it tries to move towards commercialisation of Dermacann.
But he’s optimistic the broader post-Covid tailwinds in animal health will set the stage for positive momentum into FY21.
“The next 12 months for us is all about securing partnerships with leading animal health companies to advanced our veterinary products, while slowly building the online presence for our direct-to-consumer offering,” Mills said.