Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Better Buy: Pfizer or Zoetis?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Pfizer (NYSE: PFE  ) recently spun off animal health firm Zoetis   (NYSE: ZTS  ) in the form of an IPO. Should you take a spin in the animal kingdom or stick with treating humans? Let's take a look a closer look at their business models.

Research & development
Zoetis' model relies on leveraging existing animal health products by adding new species or claims to existing drugs. It's also focused on gaining approvals in new markets and on creating new combinations and reformulations. In other words, there's not a lot of innovation going on.

While it's done its fair share of me-too drugs, Pfizer's human drug development is more innovative. That comes at a higher cost, but should pay off down the line with higher-priced drugs.

Animal health is generally a cash payer market. The animal's owners pay distributors directly for the drugs. Pfizer, on the other hand, has to deal with insurers trying to negotiate lower prices and jump through hoops to get its drugs covered.

Zoetis clearly has the advantage here, especially as health-care reform highlights drug pricing as a contentious issue.

Zoetis is the largest provider of animal health products, but it does have competition from Merck's (NYSE: MRK  ) animal health business, Sanofi's (NYSE: SNY  ) Merial, Bayer, Boehringer Ingelheim, and Eli Lilly. Interestingly, the companies seem to have found their own niches which has cut down on competition at the product level, allowing everyone to survive.

The lack of competition in individual products means antitrust issues come into play if companies try to join forces to top Zoetis like Merck and Sanofi did a few years ago. Some human diseases have substantial competition, but the markets are so much larger that even a small piece of a market can produce sales of hundreds of million dollars. Both Zoetis and Pfizer are big players in their respective fields and aren't going to get pushed around.

Like human medicines, drugs for animals are covered by patents. Unlike humans, though, when patents expire, it isn't as big of a deal for a couple of reasons.

First, there's no Lipitor of the animal drug world. Zoetis sells hundreds of products. In 2011, its top-selling product line, the ceftiofur line, contributed less than 8% of revenue. Losing patent protection on one drug isn't crucial. Second, because of the smaller market size, there's less incentive for generics to enter the market when a medication goes off patent. Finally, brand loyalty can keep customers around even after the drug does go off patent. There's no pharmacist following insurer's instructions to automatically switch patients to a generic.

Livestock medicines are expected to grow at a 6% clip from 2011 to 2016 and companion animal products are expected to grow 5% over that time frame, according to Vetnosis, a research and consulting firm specializing in global animal health and veterinary medicine.

I think Pfizer should be able to grow faster than that post-Plavix, but a lot depends on how health-care reform plays out.

Own both?
That's not such a bad idea.

I'm intrigued by the animal health business. It has a lot of advantages over its human counterpart, although the increased stability likely comes with a lower potential for explosive growth. Pfizer and Zoetis can serve different purposes in your portfolio.

Technically, you can own a part of both by purchasing shares of Pfizer; the pharma giant still owns 83% of Zoetis. But Zoetis' contribution is a minor portion of Pfizer's overall business. The growth and stability at Zoetis will hardly affect Pfizer's earnings needle. If you want to take advantage of Zoetis' potential, you'll have to buy shares of Zoetis in addition to Pfizer's.

Pfizer's investors might be able to get them directly from Pfizer. I think it's likely we'll see Pfizer follow the same path as Bristol-Myers Squibb (NYSE: BMY  ) , which did an IPO with its baby formula business, Mead Johnson Nutrition and then allowed investors to trade some or all of their shares of Bristol for share of Mead Johnson at a slight discount. Shares of both companies have beaten the S&P500 since the trade was announced.

Can Merck beat the patent cliff?
This titan of the pharmaceutical industry stumbled into 2013 and continues to battle patent expirations and pipeline problems. Is Merck still a solid dividend play or should investors be looking elsewhere? In a new premium research report on Merck, the Fool tackles all of the company's moving parts, its major market opportunities, and reasons to both buy and sell. To find out more -- and get a full year of free updates -- click here to claim your copy today.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2260020, ~/Articles/ArticleHandler.aspx, 9/25/2016 3:39:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:00 PM
BMY $56.48 Up +0.06 +0.11%
Bristol-Myers Squi… CAPS Rating: ****
LLY $81.16 Down -0.13 -0.16%
Eli Lilly and Co. CAPS Rating: ***
MJN $78.35 Down -0.90 -1.14%
Mead Johnson Nutri… CAPS Rating: ***
MRK $62.96 Down -0.06 -0.10%
Merck and Co. CAPS Rating: ****
PFE $34.26 Up +0.11 +0.32%
Pfizer CAPS Rating: ****
SNY $38.35 Down -0.22 -0.57%
Sanofi CAPS Rating: *****