A Member of the Family

Jul 12, 2024 7 min read

Florian

“Pets are humanizing. They remind us we have an obligation and responsibility to preserve and nurture and care for all life”

– James Cromwell

arvy’s teaser: Zoetis, spun off from Pfizer, has become an undisputed leader in animal health. Driven by the unwavering spending of pet owners and innovative treatments, Zoetis is thriving in a booming market. But the stakes are high: the company must always deliver – or face swift consequences.

Pets.

They occupy a very emotional place in our lives.

From dogs and cats to mice and budgies. As humans, we quickly become attached to them and develop a protective instinct. So much so that most pet owners consider their pets to be part of their family, and many say they are equal to humans (chart 1). Having grown up with a cat in the family, I agree 100%. A caring pet owner knows that whether it is a visit to the vet, a new toy for Charlie the dog or spoiling Luna the kitten with a treat – we spare no expense.

This combination of a very intrinsically motivated consumer, supported by watery-eyed children and long-standing relationships, makes for an attractive industry. The global animal health sector.

There you will find an undisputed market leader.

Zoetis.

Chart 1: % of US pet owners saying they consider any of their pets to be a part of their family

Source: Pew Research Center

Crown Juwel

First things first: Zoetis was part of Pfizer – the company that invented Viagra.

In 2013, it was spun off as an independent company. Zoetis went public with a market capitalization of $12 billion. Pfizer during this time? Around $200 billion.

Today?

Zoetis is worth $80 billion, and Pfizer has shrunk to $160 billion. Zoetis has become the world leader in animal health (chart 2), while Pfizer has been treading water.

It became clear. Pfizer spun off its crown jewels.

Why was Zoetis able to grow so strongly? Why is the market so interesting? Because there are two powerful but simple facts:

People are spending every penny on their pets. And households are owning more pets and spending is increasing
You cannot ask an animal what the problem is. You must do some kind of test (diagnostics).

The animal health industry is still relatively new, and it meets the two above-mentioned facts which make it enormously attractive. People are willing buyers, the customer base is fragmented and generic competition is minimal as patents are still in place for new drugs.

These facts give the manufacturers of animal medicines and diagnostics considerable pricing power.

And this is exactly what Zoetis is building on.

Chart 2: World leader in Animal Health

Source: Zoetis, Q1 2024 report

Growth from within and without

Zoetis has gone full steam ahead in recent years. The company has never rested on its laurels.

It has consistently grown faster (8% p.a.) than the core animal health market (5% p.a.).

How so?

The company has stood out for its impressive innovation, which is reflected across its product portfolio (chart 3), including several drugs for specific animal diseases such as osteoarthritis pain. The company has also sought to expand its presence into virtually all types of animal-related healthcare markets, including aquaculture and pet diagnostics. Today, the companion animal segment accounts for 65% of revenues and the livestock (cattle) segment for 35%.

Furthermore, Zoetis is not only growing from within through its product offering, a clear focus on reinvesting in its own business to further innovate and expand into new areas. Its growth is also underpinned by external factors.

The key drivers are:

Increasing medicalization
Growing human-animal bond
Innovation to treat chronic diseases and improve wellness (growing middle class)
Expanding global population and animal protein demand (livestock)
Advancing sustainable animal agriculture

All in all, we are dealing with a “Good Story” that is active in an attractive, structural growth market, but which can even grow faster than its underlying market thanks to its first-class operations.

As is so often the case, such quality comes at a price.

And its strongest advantage can also be a burden.

Chart 3: 15 blockbusters (>100 million annual sales) across the entire spectrum of care

Source: Zoetis, Q1 2024 report

Woe betide them if they fail to deliver!

The bond between humans and animals and the willingness to pay for everything when the pet is ill, even if the owner has to make sacrifices, is an enormous force.

But it can also backfire, woe betide them if they fail to deliver!

This happened recently.

Zoetis has become the first company of its kind to receive approval for two highly anticipated drugs, Solensia and Librela, for pain associated with osteoarthritis in cats and dogs.

Nevertheless, side effects occurred in 0.25% of the 18 million doses distributed – a normal figure. This problem was offset by a high company valuation on the stock exchange and, of course, upset pet owners. The press attention was intense, and Zoetis lost more than 20 % within a few days. The stock market knew no mercy.

You see, you have a customer on the other side where you only have one option.

To deliver.

Chart 4: Zoetis over ten years