PetMed Express is getting a taste of its own medicine.

Losing sales to new competition from retailers as diverse as Target, Amazon and PetSmart, the corporate parent of 1-800-PetMeds has reported shrinking profits for six quarters in a row and is on its way to a second straight year of declining revenue. The company’s stock price has dropped 45 percent since the beginning of the year.

While PetMed Express has substantial cash reserves and is still quite profitable — as of Sept. 30 it had $57 million in the bank and reported profits of $17.44 million for the previous 12 months — it has lost the momentum that placed it among the hottest publicly traded small companies just a few years ago.

But PetMed Express's declining fortunes don’t necessarily mean good news for veterinary practice owners, many of whom have chafed at the Miami-area company’s television commercials encouraging pet owners to “skip a visit to the veterinarian” and buy medications online. That’s because the same retailers that are grabbing sales from PetMed Express are also looking to eat into veterinarians’ still-dominant position in the pet medication market.

According to market research data in a PetMed Express investor presentation, veterinary clinics control roughly 67 percent of the $3.8 billion pet medication market. PetMed Express Chief Financial Officer Bruce Rosenbloom said the $3.8 billion figure includes only over-the-counter and prescription pet medications that are sold to consumers; it does not include products that would be used only in an animal hospital, such as surgical anesthetics.

Brick-and-mortar retailers including Target, Wal-Mart, Walgreens, PetSmart and their respective websites account for 22 percent of the market. PetMed Express has slightly more than 6 percent of the market, while all other online and mail-order retailers, including Amazon, account for 5 percent.

Thus, there is still money to be made taking business away from veterinarians, and retailers are upping their efforts. During the past year, Target has dramatically expanded its veterinary pharmacy program from a pilot effort in four states launched in fall 2010 to 670 stores in 25 states. Kroger, the nation’s largest grocery chain, now is carrying prescription and over-the-counter pet medications in its pharmacies. Amazon.com frequently sells a six-dose package of the popular flea and tick treatment Frontline Plus for at least $10 less than 1-800-PetMeds, a discount of 13 percent or more.

“They all see this as an opportunity to increase sales and do cross-marketing," said Donald Plumb, a retired pharmacist, author of Plumb’s Veterinary Drug Handbook and former director of the University of Minnesota’s veterinary teaching hospital.

One factor driving the push by retailers is the relatively recent easing of constraints on the supply chain for over-the-counter pet medications — especially big-selling flea and tick treatments — that most manufacturers ostensibly distribute only through veterinary clinics, said Dr. Race Foster, a veterinarian who has run mail-order pharmacy Drs. Foster & Smith since 1983.

Through a practice known as diversion, veterinarians sell these medications to brokers, who then supply retailers. Diversion of non-prescription drugs generally is not illegal, though some states require resellers to have a license to distribute.

Since 2009, obtaining such products through diversion channels has gotten much easier for retailers, Foster said.

“Until (two years ago), it was pretty much cash on delivery, and it was difficult to get.  Now there's no difficulty in obtaining any product,” Foster said. “The cost has come down on the diverted product, and you don't have to pay cash. It's everywhere out there.”

Consequently, treatments like Merial’s Frontline Plus, which the company insists it distributes only to veterinary clinics, are available widely on the websites of major retailers at prices that are similar to or lower than what’s available at 1800PetMeds.com.

Edward Woo, a research analyst with Wedbush Securities, a financial services and investment firm, noted that an estimated 65 percent of PetMed Express sales are over-the-counter items (mainly flea and tick products), meaning that the company is heavily exposed to competition from bigger retailers. Woo said there’s somewhat less competition in the prescription veterinary drug niche, in part because of licensing requirements. He anticipates that PetMed Express’ sales will continue to fall next year as customers buy over-the-counter products elsewhere. But he also predicts the company will maintain its strong position in the prescription-medication niche and anticipates revenues to rebound somewhat in 2013.

In the company’s most recent quarterly earnings conference call, in October, CEO Menderes Akdag said the company plans to increase advertising spending in the coming year in hopes of boosting sales. He attributed the falling revenue to increased competition as well as to the company’s decision to delay carrying the generic versions of Frontline and Frontline Plus due to pending legal action by Merial against the makers of the generics. Other retailers have been carrying the generics, which are highly profitable, Akdag said.

Beyond plans to increase advertising and carry generic Frontline, Akdag gave no indication of changes the company would make to reverse the decline in revenue and profits — a position that some analysts see as complacent.

“They have no irons in the fire to make them compete against PetSmart or Target or Wal-Mart,” said one analyst, who is precluded by her employer’s policy from being identified by name. “Personally, I think PetMed Express is going to go the way of the Yellow Pages,” she said.

Rather than investing in major new initiatives or acquiring other companies, PetMed Express has been returning cash to shareholders in the form of dividends and share buybacks. It pays a large dividend (over 5 percent of share value annually at the stock’s current price, compared with an average of 1.44 percent for stocks in the Russell 2000 small-cap stock index, of which PetMed Express is a part) and has spent roughly $70 million since 2008 — with plans to spend an additional $10 million — repurchasing company stock to help support the price.

In an interview, CFO Rosenbloom said that the company has been — and remains — quite profitable, and that the company has little short-term need for its accumulated cash.

"We really have set ourselves up for the long term. Going forward on a cash-requirement basis, we're really in a maintenance mode. Our capital expenses should be $500,000 to $1 million" per year, he said.

Founded in 1996, PetMed Express enjoyed several periods of rapid growth during the 2000s. In 2006, BusinessWeek featured the company at number 27 in its issue on “Hot Growth Companies.” From 2006 to 2008, PetMed Express ranked in the top six on the Forbes list of the nation’s best small companies. Company founder Marc Puleo, MD, an anesthesiologist, threw big parties at his Miami Beach home, purchased in 2004 from pop singer Enrique Iglesias for a reported $7.8 million.
 
As the company grew, it alienated the veterinary community. In the early years, PetMed Express employed veterinarians who would prescribe medications over the telephone without ever seeing a patient, a practice that led regulators in several states to take disciplinary action. Advertising campaigns have stressed the notion that medications sold through veterinary clinics are overpriced.

Many in the profession continue to feel animosity toward PetMed Express. News that the company was scheduled to have a booth at the upcoming North American Veterinary Conference (NAVC) sparked substantial protest on the NAVC Facebook page and a petition drive urging the conference to turn PetMed Express away. By Dec. 6, the controversy had grown to the point that PetMed Express withdrew from the conference.