A Whole New Animal Hospital

For the ordinary pet owner, the reality may not be a $23,000 dog house for Spot or a $100 spa treatment for Fifi. The big money goes to veterinary care and medical bills for serious illnesses or accidents.

Erika Maschmeyer experienced that first hand when her French bulldog suddenly ruptured a disk, a complication from a preexisting condition. She and her husband forked over $5,000 for surgery for her “surrogate baby.”

More than half of the $40.8 billion Americans will spend on pets this year will go to health care, according to the American Pet Products Manufacturing Association. Doctor bills alone accounted for more than $9.4 billion in 2006, up 8% from the previous year.

Not only are people spending more on their pets, but “pets are living longer, people are being more proactive with vet care and the vet business has become more sophisticated,” said Maschmeyer, who also happens to track the pet industry as an equity research associate for Robert W. Baird & Co.’s consumer retail unit.

Technological advancements and more investment in pet medicine have led to a boon in the animal health business, making it the fastest growing segment of the industry. More human services are being applied to pets, from expensive prodecudes like brain surgery and dialysis to high-end diagnostics, such as MRIs and CAT scans, to alternative therapies like acupuncture. Eli Lilly in January launched a new business group dedicated to producing medicines for dogs and cats, joining rivals Pfizer, Bayer and Novartis as a player in the field.

“We look forward to meeting the significant, unmet needs in this health care arena applying new molecules and give pets a higher quality of life and longer lives,” said Eric Graves, director of Lilly’s new animal health unit.

“We’re bringing new applications, new technologies to the veterinary field,” added Stephen Connell, a veterinarian and the unit’s manager of Technical, Academic and Consumer Services. That may be something of an understatement -- separation anxiety, the pet behavior area, obesity and cancer are just some of the fields in need of investment, he says.

The greater focus on animal health has led to a growing pet insurance business. U.S. sales of pet insurance topped $160 million in 2005, up nearly 25% from $129 million in 2004, according to Packaged Facts, the publishing division of MarketResearch.com. Still, of the more than 164 million dogs and cats in the U.S., only about 3% are insured. Pet insurance revenue is expected to hit $551 million by 2010.

Pet companies are already in the insurance market. Iams, for instance, owns an 8.9% interest in Veterinary Pet Insurance, the market leader with an 80% share. But industry insiders speculate that, with the anticipated growth in the market, a large conventional insurance company may buy its way in. On the hospital side, VCA Antech is the largest pet-health provider in the U.S. and is expected to post nearly $1 billion in revenue for 2006.

Lilly’s Graves said his own experience when his golden retriever Scarlett passed away from kidney failure highlights the importance of innovation in pet medicine.

"That’s an example of one of the unmet needs we’re looking to fill,” he said.

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