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MWI Vet-IDEXX Bond 'Non-Exclusive' (revised)

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MWI Veterinary Supply, Inc. (MWIV), a worldwide distributor of animal health products to veterinarians, has formed a revised distribution relationship with IDEXX Laboratories, Inc. (IDXX), a manufacturer of veterinary diagnostic products. Both companies entered into a non-exclusive distribution agreement, per which MWI Vet, as a business partner of IDEXX, will also be able to distribute other competitive diagnostic products.

With this modified agreement, MWI Vet will remain a value-added distributor of IDEXX and will be eligible for a reduced discount from the list price at which IDEXX sells its products. Execution of the new terms, which is expected by January 1, 2013, is subject to the review and clearance of the U.S. Federal Trade Commission (‘FTC’). MWI Vet believes that the modification of IDEXX’s terms will aid its future growth, although the financial impact was not disclosed.

This issue came into the forefront in 2010 when IDEXX received a request letter and subsequent subpoenas from the FTC regarding investigation of its U.S. distributor strategy. FTC started an investigation to check whether IDEXX violated the FTC Act by engaging in unfair methods of competition. As per the initial agreement with IDEXX, contrary to our original report, MWI Vet was never barred from distributing competing products of IDEXX.

The U.S. market for animal health products distribution is highly fragmented with numerous national, regional and local distributors. MWI Vet is currently focused on preserving long-term customer relationships as well as building new ones.

Other than the agreement with IDEXX, MWI Vet's long term distribution agreements include a 13-year contract with Banfield, the largest private veterinary practice in the U.S. The company also maintains a strong relationship with Feeders' Advantage, a buying group comprising several large cattle feeders in the U.S.

MWI Vet primarily sources the vast majority of its products from several vendors. Although vendors have relationships with multiple distributors, the company has successfully maintained long-term relationships with many of them including the likes of Pfizer Inc. (PFE), Merial and Vedco. We believe that in spite of the veterinary market being highly competitive, strong bonding with both vendors and customers has enabled the company to achieve robust growth.

However, the company faces stiff competition from key player like Henry Schein (HSIC) among others. Currently, MWI Vet retains a short-term Zacks #2 Rank (Buy). However, over the long term (3-6 months), we are Neutral on the stock.

(We are reissuing this article to correct a mistake. The original article, issued August 10, 2012, should no longer be relied upon.)

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