Pfizer Prodigy Spotlights $22B Animal Health Market
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I've always been taught that much can be derived from the meaning of a name. If this adage is true, than Pfizer (NYSE: PFE) subsidiary New York-based Zoetis Inc., which has filed its IPO registration statement with the US Securities and Exchange Commission (SEC), has a bright future ahead in the publicly traded markets. The root word for Zoetis is zo, which of course is part of the more ubiquitous terms such as zoo and zoology. Zoetis also derives from zoe - another way of saying 'life' or 'pertaining to life.' This stock could bring a lifetime of gains to investors if its as promising as the company's registration statement suggests.
Zoetis Inc, a Pfizer wholly-owned subsidiary devoted to the animal health business, will spin off and begin trading as its own entity by next year, according to an S-1 filing with the SEC. The new offering is scheduled for the second half of 2012, and as much as 20% of the company's equity will be sold.
Pfizer, which owns all of Zoetis' Class A shares at the moment, will surrender those holdings in exchange for a percentage of its debt. Those creditors, or 'debt exchange parties,' will then receive the rights to sell those shares and neither Pfizer or Zoetis will earn proceeds from the offering, according to the filing. That's one way to pay down debt.
Neither the IPO price or the stock symbol were revealed, but underwriters are the trio of JPMorgan, Bank of America Merrill Lynch and Morgan Stanley.
Even if you've never heard of Zoetis, if you have a domestic pet it's likely you've been exposed to some of their products. The pet health company has a track record that boasts of more than six decades and that spans the globe. Zoetis has a footprint across North America, Europe, Africa, the Middle East, Latin America and Asia Pacific with the lion's share of revenues derived from the US.
According to the filing, Zoetis is in the business of "discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals." For the year ended December 31, 2011, sales were a staggering $4.2 billion.
Who knew the animal health market was one with such enticing growth potential? According to Vetnosis consulting firm cited in Zoetis' S-1 filing, the global animal health medicine market for livestock and companion animals is worth $22 billion globally. More, the research firm expects a compound annual growth rate of 6% annually between 2011 and 2016. Indeed, Global Industry Analysts projects that the worldwide animal health segment will hit $42.9 billion over the next six years, driven in part by the heightened awareness of the impact that animal health for livestock has on the food chain.
Nonetheless, it's a dog-eat-dog world for animal healthcare. Zoetis is up against the likes of Elanco, Eli Lilly & Co's (NYSE: LLY) animal health business. Elanco helped to hold up its larger parent company in the most recent earnings quarter, staging a 32% surge in sales in the 2Q versus the year ago period to $512 million versus. That segment represented one of the top sales performances for the drugmaker, trailing only Lilly's Effient, a drug-thinning drug for people. For its part, Lilly seems dedicated to its animal health division and is counting on the business segment for future revenue growth.
Merck (NYSE: MRK) is another rival in this animal healthcare space. The drugmaker giant grew its revenues for livestock and pet meds by 8% in the second quarter, and similar to Eli Lilly is steadfast in its commitment to its animal health business.
To be fair, it's no secret that pharmaceutical stocks can be risky bets amid uncertainties surrounding new medicines and the unpredictability of the US FDA, as well as infighting via potential litigation pertaining to patents and generic drugs, all of which is compounded by the lengthy nature and unpredictability of clinical drug trials. Animal health, however, has some unique differences to human healthcare, which adds to the compelling nature of this forthcoming new issue in particular.
In its filing, Zoetis trumpets several distinguishing factors between the animal health and human health markets that illuminate the former.
Chief among the differences is speed - animal drugs come to market faster than human remedies. These benefits are a direct result of the fact that fewer clinical trials and species are necessary for animal drug testing. Plus, the trials are performed directly on the species for which the medicine is intended, unlike human drug trials which are generally performed on rodents. The bottom line with this characteristic is that decisions on the future of a given pet remedy can be made faster, which might appeal to shorter-term investors.
The filing also suggests that animal health providers have a more diverse portfolio set than the makers of human drugs, and as a result there is no real polarizing effect from the success or failure of a single product. Also, owners tend to pay for animal health with cash, or at least out of pocket, which leads to fewer insurance loopholes & complexities that this market segment has to deal with. The filing also claims that competition for generics is less intense in the animal health market for the sheer size of the market and also as a result of customer loyalties that tend to accompany the veterinarian industry.
All in all, Zoetis certainly appears to be a stock that will be worth watching - and - possibly buying. Not only does it bode well for the IPO pipeline, but it will also be interesting to see the animal health segment balloon and any shifts that might unfold in the competitive landscape.
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