Avalon Ventures prides itself on making successful bets in diverse areas that other investors overlook.
Avalon’s tech team made an early-stage investment in Zynga Game Network Inc. two years before the social-gaming Gold Rush of 2010 began.
And several years ago, the firm’s biotechnology and life sciences team backed companies working on treatments for “orphan diseases,” an area that received little attention at the time but which is now a high priority for companies like GlaxoSmithKline PLC and Pfizer Inc.
Now Avalon is gearing up for another move into uncharted waters: investing in the business of keeping dogs and cats healthy.
Managing Director Jay Lichter calls it “a new paradigm,” and one that will pay off.
“I recently asked a room full of people, ‘How many of you have spent a thousand dollars or more on your pet’s health in the past year?’ At least half the people raised their hands,” Lichter said. “Currently, there’s no one else in this space doing investing. There is quite a large number of opportunities out there.”
The following table offers a breakdown of the sales of the U.S. pet industry for 2009 and the estimated breakdown for 201
| Category | 2009 Actual | 2010 EST | |
| Food | $17.56 | $18.28 | |
| SupplOTC Meds | $10.41 | $11.01 | |
| Vet Care | $12.04 | $12.79 | |
| Live Animal Purch | $2.21 | $2.21 | |
| Grooming & Boarding | $3.36 | $3.45 |
Totals: $45.5 $47.7
U.S. Pet Industry Expenditure since 19949
Estimated Expenditure U.S. Pet Industry Next Five Years
Consumer Spending on Veterinary Services (In Billions)
Avalon has already found one. The firm earlier this month backed Aratana Inc. - which is working on pharmaceuticals for dogs and cats – alongside MPM Capital in a $20 million funding round.
Aratana, which has not yet disclosed what types of diseases it will target, aims to license human medicines for use in pets, a less daunting project than taking a drug company from the idea stage to Phase II trials. Lichter said the approval process for such therapeutics is shorter, as the medicines in question will have already passed certain regulatory hurdles. Additionally, the Food and Drug Administration has less stringent standards for pet medications than it does for human treatments.
“I don’t start from the ‘Eureka!’ idea,” Lichter said. “I’m going to start from a human product that’s late in development. I license it. It makes economic sense. I’m looking for compounds that are currently in human development, and have shown efficacy in at least two species.”
In biotech investing, VCs are used to spending eight years and tens of millions of dollars to get from an idea to Phase II testing. By contrast, an animal health product should take three years and about $5 million, Lichter said.
For later-stage biotech companies, the landscape is approximately 20 large, public pharma and device companies circling around 2,000 start-ups, Lichter said. Animal health is more like 12 large companies being served by five or six start-ups, he said.
Risky? Probably. “But if I don’t take big chances, as a venture capitalist how am I any different than a large corporation?” Lichter said.
“As a fund, we’ve always been in areas before other people. That’s what makes us money. We’ve always been one step ahead.”
COMMENTARY: I have considerable experience in the U.S. pet industry, and the numbers are very impressive. U.S. pet veterinary and OTC medicines are a $22 billion to $23 billion industry. I can understand Avalon Ventures interest in the pet health care. Here are some interesting U.S. pet ownership and demographics:
- In 2006, nearly half of pet owners, or 49.7%, considered their pets to be family members.
- There are more than 72 million pet dogs in the U.S. and nearly 82 million pet cats.
- The average veterinary expenditure per household for all pets was $366 in 2006.
- Among horse-owning households, 61.1% had at least one visit to the veterinarian in 2006, an increase of 11.9% from 2001.
U.S. Pet Market
According to market researcher Packaged Facts, the U.S. pet market grew to $53 billion in 2009 (this is higher than Pet Franchise Industry) and overall sales are expected to continue to increase over the next few years.
“U.S. Pet Market Outlook 2010-2011: Tapping into Post-Recession Pet Parent Spending” projects U.S. pet market retail sales and trends overall and for four core categories: veterinary services, pet food, nonfood pet supplies and nonmedical pet services. The report found that sales of all pet products and services rose 5 percent in 2009 to $53 billion, with sales of veterinary services increasing the most to $18.40 billion. Moreover, pent-up pet owner demand for products and services that both enhance pet health and pamper animalcompanions will begin to kick in during 2010, according to the report.
“The pet market has fared well overall despite the recession, and Packaged Facts attributes this performance to a number of factors that will also be integral to its even better performance in 2010 and 2011,” said Don Montuori, publisher of Packaged Facts. “Chief among these factors is the human-animal bond, which is an excellent insulator against recessionary cutbacks, and the ‘pet parent’ sentiment has never been higher.”
Packaged Facts projects total retail sales to increase to $55.78 billion in 2010 and to $59.28 billion in 2011, and to continue to rise to $72 billion by 2014. Still, the report noted that most economists predict a slow recovery.
“As a consequence, no pet market participant can afford to sit back during 2010 or to ignorerecessionary effects on consumer shopping patterns that could linger for years,” the report stated.
- According to the 2007-2008 National Pet Owners Survey, 63% of U.S. households own a pet, which equates to 71.1 millions homes
- As of 2006, 77% of dog owners and 52% of cat owners gave their pets medications or drugs, up from 50% and 32% in 2000, respectively
- Estimated 2008 Sales within the U.S. Market. For 2008, it estimated that $43.4 billion will be spent on our pets in the U.S. (see breakdown below):
Food $16.9 billion Vet Care $10.9 billion Supplies/OTC Medicine $10.3 billion Live animal purchases $2.1 billion Pet Services: grooming & boarding $3.2 billion - Actual Sales within the U.S. Market in 2007. In 2007, $41.2 billion was spent on our pets in the U.S. (see breakdown below):
Food $16.2 billion Vet Care $10.1 billion Supplies/OTC Medicine $9.8 billion Live animal purchases $2.1 billion Pet Services: grooming & boarding $3.0 billion
Pet Insurance Snapshot
- In the U.S. alone, over 10.0 billion dollars were spent on pet medications in 2007. – NPR, Morning Edition.
- Total worldwide sales of animal medicines was $19.2 billion in 2008, up 7.2 percent over sales the previous year – British research firm Vetnosis Ltd.
Avalon Venture's experience in bioscience certainly qualifies them to pursue a strategy of acquiring therapeutic medicines in stage II trials, that could be adapted for use in pets, is a good strategy.
Courte4sy of an article dated January 24, 2011 appearing in The Wall Street Journal's Venture Capital Dispatch
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