Virbac Corporation

3200 Meacham Boulevard
Fort Worth, Texas 76137
U.S.A.
Telephone: (817) 831-5030
Fax: (817) 831-8327
Web site: http://www.virbaccorp.com

Public Company
Incorporated: 1987 as Virbac Inc.
Employees: 262
Sales: $67.1 million (2003)
Stock Exchanges: Pink Sheets
Ticker Symbol: VBAC
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Virbac Corporation is a Fort Worth, Texas-based manufacturer of health and pet-care products, primarily for cats and dogs, such as shampoos and skin care products, dental products, vitamins and supplements, medicated feed additives, flea and tick products, wormers, ear cleaners, and hairball remedies. In addition, the company makes tropical fish products, including aquarium water conditioners and test strips. To a lesser degree, Virbac is involved in the specialty chemical business, producing rodenticides, pest control products, and home, lawn, and garden products. Virbac also offers private label and contract manufacturing services for animal health and specialty chemicals industries. The company maintains two major facilities. Its Fort Worth 127,000-square-foot operation houses manufacturing, warehousing, distribution, and office functions. Most of Virbac's products not regulated by the Environmental Protection Agency (EPA) are manufactured in Fort Worth. The second plant, 176,000 square feet in size, is located in Bridgeton, Missouri. Because it is an EPA and Food and Drug Administration (FDA) registered facility, it manufactures most of the company's EPA and FDA regulated products. Bridgeton also handles Virbac's contract manufacturing business. Virbac is a public company, majority owned by France-based Virbac SA. Its shares are traded on a Pink Sheets basis, due to a delisting by the NASDAQ following an accounting scandal that emerged in 2003 and resulted in the resignation of the chief executive officer and the chief financial officer, as well as a probe by the Securities and Exchange Commission (SEC).

Company Founded in Early 1980s

Virbac considers its founder to be Roger Brandt, a Texas businessman involved in the pharmaceutical industry. In 1981, he spotted an opening in the pet-care field to produce skin care products developed specifically for dogs. At the time, veterinarians had nothing to prescribe for dogs other than human dermatological products, but these were not suited to the task. Brandt formed a company called Allerderm in 1982 to address this need, initially producing anti-itch shampoos. Over the next five years, the business established itself in the pet-care field and attracted the attention of Virbac SA, a global veterinary pharmaceutical manufacturer. The French company acquired Allerderm in 1987 and changed its name to Virbac Inc., then sold off part of the company in a public offering of stock held in 1994. Virbac performed well in the 1990s, as did the entire pet industry, which was worth about $25 billion by the later years of that decade and enjoying annual growth in the 15 percent range. To form a larger and more competitive business, in 1999 Virbac, which was doing about $15 million a year in sales, was merged with a larger pet-care company, Agri-Nutrition Group, a St. Louis-area manufacturer of dental hygiene, nutritional, and grooming products for cats and dogs that was doing about $35 million in business each year.

Agri-Nutrition Gains Independence in Early 1990s

Agri-Nutrition grew out of the Health Industries Business of Purina Mills Inc. In 1993, an investor group acquired the unit through a subsidiary called PM Resources, Inc. (PM standing for Purina Mills), which then became part of a Delaware corporation, PM Agri-Nutrition Group, formed three months later. In July 1994, the company was taken public, netting $12.1 million that was used to fuel expansion. The company assumed the Agri-Nutrition Group Ltd. name in March 1995, and by the end of the month paid $3.3 million for Zema Corporation, a North Carolina maker of health care and pet grooming products. In August of that year, Agri-Nutrition spent another $5.5 million for St. JON Laboratories, a Los Angeles-based company that manufactured oral hygiene, dermatological, and gastrointestinal products for cats and dogs and also maintained a London, United Kingdom-based subsidiary, St. JON VRx Products. Next, in September 1997, Agri-Nutrition paid nearly $2.5 million in cash and stock to acquire Mardel Laboratories, a Glendale Heights, Illinois, company that manufactured and marketed pet care products for cats, dogs, birds, small animals, and fresh water and marine fish. It also offered pond accessories. Agri-Nutrition now split its business into two units: the Pet Health Care Division, focusing on pet owners, and PM Resources, which took care of the company's private label and contract manufacturing operations.

Although Agri-Nutrition was more than twice as large as Virbac Inc., the later was considered the acquirer because its parent company, Virbac SA received 60 percent of the voting stock of the combined business. The merger was completed in March 1999, with Pascal Boissy, president of Virbac SA, assuming the chairmanship, and Virbac's CEO Dr. Brian A. Crook staying on as chief executive. Agri-Nutrition's CEO, Bruce G. Baker, became an executive vice-president of the enlarged company, which settled on the large Fort Worth facility as its headquarters. Crook's tenure would be brief, however. Within a matter of weeks he resigned to "pursue other interests," according to a company statement, and was replaced by Thomas L. Bell. The son of a truck driver, the 40-year-old Bell had devoted his adult working life to the animal and livestock healthcare industry. After earning a chemistry degree, with a minor in business administration, from Mount Union College in Ohio, he took a job as a sales representative in the animal health division of Diamond Shamrock. Several years later he joined the Fort Dodge Animal Health subsidiary of American Cyanamid, where he spent 13 years, rising to the rank of vice-president for the International Animal Health and Nutrition Division.

Virbac devoted the rest of 1999 to consolidating and streamlining its business. Agri-Nutrition's Chicago and Los Angeles distribution facilities were shut down and their operations transferred to Fort Worth. All of the Chicago manufacturing was also moved to Texas, as were much of the Los Angeles manufacturing operations, leaving only a limited amount of production and marketing business to be conducted in California. In time, that would also be eliminated, leaving just the manufacturing units in Fort Worth and the St. Louis area.

With its house in order, Virbac anticipated that within a few years it would increase revenues, which totaled less than $44 million in fiscal 1999, to $100 million by the end of 2004, as well as $20 million in earnings. Management was banking on its relationship with Virbac SA to spur growth, as well as riding the wave of the pet industry, one of the strongest growing sectors of the U.S. economy. It signed agreements to have Virbac SA distribute its products internationally, as well as to distribute Virbac SA's products in the United States and Canada. Virbac also had two drugs in development to treat horse parasites, and pharmaceutical Pfizer was set to market and distribute them under a 15-year agreement, pending approval from the FDA.

Virbac achieved a solid start in its first full year since the merger, recording sales of $53.7 million in 2000, a 10 percent improvement over the combined sales from the previous year. As a result of increased sales and cost savings from the consolidation of the two operations, the company realized net income of more than $3.6 million. Virbac benefited from the increase sale of oral hygiene and dermatological products and a bump in its contract manufacturing business. Virbac's consumer brands division also acquired the rights to Pet-Tabs, a cat and dog nutritional supplement, that management hoped would add another $5 million in sales in 2001. Business was also boosted in 2001 with the introduction of Iverhart Plus, a dog heartworm prevention product. In addition, the company gained FDA approval for the two Pfizer products and began manufacturing Worm-X, a dog wormer, and Virbamec, a wormer for cattle. To accommodate is expanded production, a 1,500-square-foot manufacturing suite was added to the Bridgeton plant. Bell touted the potential of the three new products, telling the press that they offered a $640 million market opportunity. If true, the company was well on its way to meeting Bell's announced goal of "reaching a $20 million bottom line on a $100 million top line by 2004."

At the end of 2001, management reported revenues of $60.6 million and net income of $1.3 million, a far cry from keeping pace with Bell's goal, and eventually these numbers would come under scrutiny. In the meantime, the task of reaching the $100 million level grew even more difficult as Virbac began experiencing increased competition in the pet store sales channel as well as from products sold by mass merchants, affecting sales in all product categories. To offset this deteriorating situation, the company began seeking ways to sell their products through mass-market outlets such as supermarkets, drug store chains, and discounters. Revenues were also hurt by the decision to cut back on low-margin contract manufacturing in order to devote resources to Virbac's branded products. For the year 2002, management reported sales of $63.8 million and net income of $3.4 million.

In 2003, Virbac sought to improve its product mix by increasing its presence in the animal pharmaceutical business through acquisition. In August, it added Delmarva Laboratories, a small Virginia-based veterinary pharmaceuticals company that manufactured two antibiotics and two euthanasia drugs. A month later, Virbac paid $15.1 million for the veterinary medicine business of King Pharmaceuticals, a Tennessee pharmaceutical company that primarily manufactured drugs for human consumption and was looking to divest non-core products. As a result, Virbac added several products in the small-animal endocrinology market as well as products to treat gland-related conditions, the most important of which was Soloxine, used in dogs as a thyroid hormone replacement. Other King products included Pancrezyme, Tumil-K, Uroeze, and Ammonil.

Company Perspectives:

Since 1982, Virbac Corporation has provided veterinarians and pet owners with high-quality products and services to meet the needs of dogs, cats and other pets.

Scandal Emerges in Fall 2003

Wall Street was pleased with the acquisitions, as reflected by the rising price of company shares, which reached a high of $8.73 at the end of October. Just two weeks later, however, Virbac became mired in scandal. An outside auditor, Price-waterhouseCoopers, raised serious questions about the company's accounting practices and refused to sign off on its third quarter numbers. The price of Virbac shares plunged, slipping 22 percent before the NASDAQ halted the trading of the stock until the company was able to provide some clarification. In mid-December 2003, Virbac admitted that it had been improperly counting revenue since 2001. At the same time, it announced that Bell was taking a voluntary leave of absence with pay until an investigation was completed by the company's audit committee. David Eller, a Houston drug industry executive, was hired to step in as interim CEO.

According to the Fort Worth Star-Telegram , Virbac booked revenues for products that were either returned later or destroyed after the lapse of their expiration date. Moreover, the company "shipped products from its veterinary division to wholesalers during the final days of several quarters to boost revenues in those quarters but held off on final delivery until the subsequent quarters had begun." Virbac also "booked revenue from some products in its manufacturing and livestock division at the time of shipment. Those orders should have been treated as consignments, with no revenue counted until Virbac had been paid, the company said." As a result, Virbac's net income had been inflated by $900,000 in 2001 and $1.3 million in 2002. Reported sales fell from $60.6 million to $56.3 million in 2001, and $62 million from $63.8 million in 2002.

Law firms representing shareholders wasted little time in filing lawsuits against Virbac, alleging it had misrepresented its financial condition. Then, in January 2004, the NASDAQ delisted the company, and Bell, along with CFO Joseph Rougraff, resigned. Soon the SEC launched a probe, the scope and nature of which was uncertain until January 2005, when the company received a "Wells notice," a formal warning the SEC issued to companies, indicating that the commission might pursue civil action. Not only did the company face the prospect of SEC penalties and have to contend with shareholder suits, it also had to deal with lenders. The company's mounting legal and accounting fees left insufficient cash to repay borrowing. As a result, Virbac announced in May 2005 that if lenders failed to renegotiate the terms of several loans it might seek bankruptcy protection. At least for the near term, Virbac's prospects were in question.

Principal Subsidiaries

PM Resources, Inc.; St. JON Laboratories, Inc.; Francodex Laboratories, Inc.; Virbac AH, Inc.

Key Dates:

1982:: Allerderm is founded.
1987:: Virbac SA acquires Allerderm, which is renamed Virbac Inc.
1993:: Agri-Nutrition is founded.
1994:: Agri-Nutrition is taken public.
1999:: Virbac and Agri-Nutrition merge.
2004:: Accounting errors lead to the resignation of Virbac's CEO and CFO.

Principal Competitors

The Hartz Mountain Corporation; Heska Corporation; IDEXX Labs, Inc.

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