To be frank, I very rarely get excited about initial public offerings, or IPOs. Most IPOs tend to be overpriced, and they're usually surrounded by emotional investing and businesses wanting to capitalize on the latest hot trend. When social media companies were hot in 2011-2012, some couldn't file for an IPO fast enough; when that trend cooled, some of those same companies disappeared back under a rock, not to be heard from again.
Yet, there's one IPO that I'm eagerly waiting for that's scheduled to make its debut either this month or next: Zoetis, the animal health division of Pfizer (PFE -3.85%). Pfizer plans to sell about 20% of the company initially -- still maintaining a controlling stake -- and plans to price roughly 86.1 million shares between $22 and $25, according to Reuters. In total, this would value Zoetis around $12.5 billion.
The reason I'm so excited about this IPO is, as a pet owner, I can tell you first-hand how willing pet owners are to ensure their pets live long, healthy lives. Pet owners tend to spend on their pets almost regardless of the condition of the economy, and very few owners cover their pets with insurance, meaning nearly all payments for medications come right out of pet owners' pockets, creating very lucrative margins for Pfizer! Much of this has to do with pets slowly being incorporated as "members of the family" over the past two decades, but it's also worth noting that very little competition exists among animal medications, making patent expirations somewhat a backseat worry.
I wouldn't say that Pfizer's animal health division has grown like wildfire, but there's a clear upward trend in both Zoetis' annual revenue and pet industry expenditures according to the American Pet Products Association.
Source: Pfizer's annual reports.
Source: American Pet Products Association. Figures in billions. *Estimated.
With Zoetis controlling 19% of what Pfizer estimates is a $22 billion market, it is hands down the best able to capitalize on this growing trend of pet ownership.
Furthermore, Pfizer will avoid heavy taxation by spinning off Zoetis as opposed to outright selling the unit. It'll also be putting history on its side as spinoffs have been very lucrative for shareholders over the past couple of years. In 2009, Bristol-Myers Squibb (BMY -8.51%) spun off Mead Johnson Nutrition (MJN), a children's products company it had owned for 42 years. Since the spinoff, Mead's shares have advanced 170%, and Bristol-Myers' have risen 83%. Even more recently, Abbott Laboratories (ABT -0.03%) spun off AbbVie (ABBV -0.30%), its new branded drug division. Both companies are up since the spinoff. The key point for all of these health-related businesses and for Pfizer's Zoetis is that the spinoff eventually allowed for greater earnings clarity for each individual company, making it easier for investors to the underlying businesses and ultimately boosting the share price higher for the parent and the spinoff company.
As my Foolish colleague Keith Speights has noted, Zoetis won't be the sole proprietor of animal medications and will contend with Merck's animal health division, as well as Merial, a division of Sanofi. But, considering its leading market share and assuming that Reuters has Zoetis' valuation pegged properly at $12.5 billion, a valuation of just three times sales seems very reasonable for a company that I estimate will grow anywhere from 9%-11% annually over the next five years.
Needless to say, I'm on the edge of my seat for what could be the most exciting IPO of 2013.
