// Pet medicine spawns a tens of billions market

The surge in pet consumption has driven the overall growth of the US$36 billion global animal health market. The largest area is the livestock industry, which accounts for two-thirds of the global animal health market share, while the pet industry accounts for the remaining one-third. For investors who want a direct share of the growth of the pet health care market, Wall Street analysts recommend four pet health care companies.

A series of new medicines are coming out, including treatments for itchy skin, flu, weight loss and pain relief. But these medicines are not for you, but for your pet.

The global animal health industry is growing rapidly, with China and Brazil growing the fastest

Pets are very common nowadays. According to data from the American Veterinary Medical Association, in 2016, about 57% of American households had pets, and pet dogs and cats lived longer. In terms of health care, pet owners treat their pets more and more like humans.

“Our clients range from pets raised on farms, to pets raised at home, to pets that can sleep in bed,” said Kelin, head of international business at Zoetis (ZTS), the world’s largest listed animal health company. Clint Lewis said. “As the population grows and ages, people are increasingly aware of the importance of companionship.”

According to the American Pet Products Association, in 2018, U.S. pet owners spent an estimated $15.5 billion on pet non-prescription drugs and supplies, more than double the $6.2 billion in 2001. This is only part of the animal health expenditure.

The surge in pet consumption has driven the overall growth of the US$36 billion global animal health market. The largest area is the livestock industry (medicine, vaccines, and medicinal feed additives for cattle, poultry, pigs and other animals), which accounts for two-thirds of the global animal health market share, and the pet industry accounts for the remaining third One.

Market information agency Vetnosis predicts that from 2017 to 2023, the global animal health industry will grow at a compound annual growth rate of 5%. Kevin Ellich, a senior research analyst at Craig-Hallum Capital Group, a US research, transaction, and investment banking institution, basically agrees with this view. He expects the pet industry to achieve an annual growth rate of 5% to 9%. , Higher than the livestock industry.

In the final analysis, the livestock industry is to provide food for more people, because people are getting richer and the consumption of meat is increasing. “With the growth of the middle class, especially in emerging markets, people’s demand for protein is also increasing.” Morgan Stanley analyst David Risinger said.

At the same time, the steady increase in pet spending is not limited to the United States. The two fastest growing markets for Zoetis’s business are China and Brazil. Luis, head of international business of Soton, said, “The Chinese and Brazilian markets are not only increasing the number of pet owners, but also improving the level of pet care.”

In 2018, Zoetis’s pet business revenue in China was approximately US$84 million, an increase of 47% from the US$57 million in 2017.

High price-earnings ratio, it is not easy to get a piece of the pie

For investors who want to directly benefit from the growth of the pet health care market, the opportunities are limited and expensive.

As far as Zoetis and its competitor Elano Animal Health (Elano Animal Health, ELAN) are concerned, its continued growth in sales and reliable earnings have been fully recognized by investors. Even the much smaller Phibro Animal Health (PAHC) has a P/E ratio of 19 times its expected earnings per share for the current fiscal year as of the end of June this year.

Since the spin-off from Pfizer (PFE) at the beginning of 2013, Zoetis has an annual return of 25%, while Pfizer has an annual return of 11%. The main question is whether Zoetis can maintain such a strong rate of return.

Eli Lilly has previously been a subsidiary of Eli Lilly (LLY). Since its initial public offering (IPO) price of $24 in September 2018, its share price has risen by 35%.

Bayer (Bayer, BAYRY) is seeking to sell its animal health business. However, Merck (MRK) has yet to show any signs that it will split its $4.2 billion animal health business. Merck CEO Kenneth Frazier said in a 2018 conference call with analysts that the animal health business has brought Merck’s revenue growth and diversification.

Another top five company in the industry, Boehringer Ingelheim in Germany, is a private company.

As of April 11, Zoetis’s stock price closed at $101.06, which is about 29 times the earnings per share ($3.47) estimated by analysts this year. Lilly’s P/E ratio is even higher. As of April 11, Lilly’s share price was reported at $32.34, which is about 30 times the expected earnings per share ($1.09) in 2019.

Fast development, low cost, low threat of generic drugs

Although the stock price is expensive, the animal health industry still has a lot to praise. First, the annual sales growth rate is as high as 5% to 9%, and the profit margin is also very impressive. In 2018, Zoetis’s net profit margin was slightly higher than 24%, more than twice that of 2013.

US investment bank and asset management company William Blair analyst John Kreger (John Kreger) estimates that in the next few years, Eli Lilly’s operating profit margin will increase from about 18% to about 20% to 25%.

Animal medical care has some specific advantages over human medical care. Since most pet healthcare costs are self-pay, there is not much price pressure from insurance companies in the industry. Although there are more and more types of pet insurance, it has not yet gained popularity.

Kindred Biosciences (KIN), a small animal health biotechnology company, pointed out in a document that compared to human drugs, drug development for pets is “usually faster and cheaper because pet drug development requires less clinical research. There are also fewer research subjects involved.” The company’s CEO Richard Chin said that the company is trying to find compounds that are effective on the human body so that “we don’t have to start from scratch.”

The threat of generic drugs is also relatively small. “In an industry that sells up to 100 million U.S. dollars in explosives, it is much more difficult to achieve economies of scale,” Zoetis CEO Juan Ramon Alaix (Juan Ramon Alaix) in an interview with “Barron” Middle name. To be sure, these companies have not developed many disruptive new drugs for the treatment of animal cancer. In fact, veterinarians sometimes use human drugs.

Despite this, there are still many new drugs for animals, including drugs to treat itchy skin or parasites in dogs, respiratory diseases in cattle, weight loss of unknown weight in cats, and pain relief in dogs.

“In the 1970s, we didn’t even think about using painkillers,” recalls David Bjork, a veterinarian in Walnut Creek, California, who has been practicing since 1969.

Now, scientists are now conducting more in-depth and complex research on the “causes of certain diseases” and are also capable of developing new treatments, said Catherine Knupp, head of the research and development department of Soton.

For example, in 2016, Zoetis was approved to launch a new drug Cytopoint. Cytopoint is a monoclonal antibody that can treat atopic dermatitis including dog skin itching. It is an injection-type therapeutic drug that uses antibodies to locate and neutralize canine interleukin IL-31, a cytokine that transmits itching signals to the dog’s brain.

Sometimes the pet medicine innovation process is simpler.

As many pet owners know, tracking pet dog fleas, lice and dog heartworm treatment plans every month is a complicated task, and even requires special forms. Because one medicine treats fleas and lice, and the other treats dog heartworms, and the two medicines cannot be taken at the same time. Some companies, including Zoetis, are trying to launch a product that can treat these three and other pet diseases at the same time and make it into a chewable tablet that is taken once a month.

Pet medical treatment is more attractive than livestock

Animal health in livestock is closely related to the production of protein, whether it is milk, cheese, beef, poultry, pork or fish. With the growth of the middle class, especially the middle class in developing countries, this is related to global population growth and evolving taste. “From edible rice and grains to protein, it is the product of economic growth,” said Reisinger, an analyst at Morgan Stanley.

As food companies switch to producing antibiotic-free beef, chicken, and pork, the treatment of livestock is changing. For example, most of the chicken produced by the food company Perdue Foods has a “antibiotic-free” label. McDonald’s also stated in December 2018 that it will strive to reduce the overall use of antibiotics in beef.

“From dependence on antibiotic treatment to dependence on other forms of disease management and prevention, tremendous changes have taken place,” said Jim Sandstrom, managing director of Epitopix, a US livestock vaccine manufacturer.

Better diagnostic methods, electronic herd tracking, and genetic testing will also be integrated to raise livestock.

Although the expenditure on animal health care continues to grow, sales of pet therapy products are more attractive. Compared with cats and horses, treatment sales for pet dogs are much higher.

“Compared to the previous generation, people are now less sensitive to pet prices,” William Blair said in an analysis of Krieger. “The livestock sector does not have that much momentum.”

There is a multi-billion dollar market for flea drugs

A multi-billion dollar category in the pet health care industry is insect repellents, which can control fleas, lice, and mites.

Boehringer Ingelheim is a leader in this field. Merck has successfully developed Bravecto, a drug that can kill fleas and lice on dogs and cats.

Previously, these products had to be used locally; the newly launched chewable tablets are more convenient for pet owners.

Eli Lilly’s Interceptor Plus, a product used to prevent and treat canine heartworm disease in this area, had sales of US$100 million last year.

Zoetis is also struggling to catch up in this field. Its product portfolio includes Simparica, a monthly dog ​​chewable tablet for treating fleas and lice. In order to gain a greater market share, Soton will launch a new drug Simparica Trio next year, which can be used to treat fleas, lice, canine heartworm and other internal parasites.

Zoetis Company has done a lot of work in the treatment of canine skin diseases including atopic dermatitis. The sales of Apoquel reached US$464 million in 2018, an increase of 28% over 2017. Sales of the drug Cytopoint were US$129 million. The rapid growth of the industry, coupled with a strong management team, sufficient financial flexibility, and efficient research and development capabilities, make the stock of Zoetis Company attractive, despite its high valuation.

Arawa, CEO of Soton Company, insists that Soton Company “has sufficient financial capacity to support our investment” and “adhere to the investment principle, that is, investment can maximize returns and protect long-term profitable growth areas.”

These areas include pet anthelmintics and dermatological drugs.

Eli Lilly Animal Health has been performing strongly in the livestock field and is also entering the field of animal therapy. In 2018, Eli Lilly’s animal therapy business accounted for one-third of the company’s total sales ($3 billion), including Galliprant, a drug for dog osteoarthritis, and the treatment of canine fleas and Credelio for lice.

William Blair’s analyst Krieger gave Eli Lilly’s stock a rating of “equal to the broader market”, and assigned the stock rating of Zoetis as “outperform.” The analyst believes that Zoetis’s sales can achieve organic growth at a rate of 5% to 6% per year for the next four years, while Eli Lilly’s annual sales growth rate is expected to be 3.5% to 4% (excluding Business being sold). Eli Lilly said it expects its core revenue (excluding its exited business) to grow by 4% to 6% this year.

Krieger believes that Zoetis has channel advantages and cited the recent successful performance of the company’s Apoquel and Cytopoint animal drugs. “A key unknown factor for Eli Lilly is the process of the new product,” Krieger said.

Colleen Parr Dekker, director of global external communications for Eli Lilly Animal Health, said that the company “launched approximately 3 new products each year starting in 2015.” Including Interceptor Plus.

However, investors may want to wait for a better time to buy.

At present, at least Zoetis company is moving forward at full speed, which also proves the rationality of the company’s stock valuation.


Post time: Sep-22-2020