4 Investment Opportunities in Animal Health

Pfizer (NYSE: PFE  ) recently announced plans to sell its remaining 80% stake in animal-health company Zoetis (NYSE: ZTS  ) after about four months on the public market. Margins and profits aren't as high in the animal health business, which has pushed the world's largest pharmaceutical company to streamline its focus. It also highlights a delicate Catch-22 for Big Pharma.

While animal health companies represent a sizable chunk of total revenue in the dark days of the patent cliff, investors want to see pharma companies focus solely on pharma products to successfully clear the patent cliff. Pfizer ultimately decided to appease the masses. Depending on the success of Zoetis -- and perhaps its parent -- other pharmaceutical companies may decide to release their animal health businesses. That could open up several entirely new long-term investment opportunities for your portfolio.

The one and only?
The animal health business is a $100 billion global opportunity with a $22 billion medicines and vaccines segment that is growing at a CAGR of 6%. That represents the core focus for Zoetis, which has ridden the growth to become the largest animal health businesses in the world. It may be the first to test the public markets, but there are three other closely held companies investors can keep an eye on. 

Company, Parent

2012 Sales

2012 Sales Growth

% of Total Sales

Zoetis, Pfizer

$4.3 billion

3%

7.3%

Merck Animal Health, Merck (NYSE: MRK  )

$3.4 billion

4.5%

7.2%

Merial, Sanofi (NYSE: SNY  )

$2.9 billion

3.1%

6.2%

Elanco, Eli Lilly (NYSE: LLY  )

$2.0 billion

21%

9%

Source: Company 2012 SEC filings.     

Merck has made a big push to keep Merck Animal Health on the fast track for growth and recently announced plans to relocate the division from the Netherlands to its New Jersey campus. The company hopes the move creates a more efficient business by bringing 300 employees into closer quarters and reducing costs. It also brings the company closer to America's massive cattle farms, for which Merck Animal Health offers dozens of products.   

Merial was founded in 1997 as a joint venture between Merck and Sanofi, but it was bought outright by Sanofi a few years ago for $4 billion (after Merck assumed the Intervet/Schering-Plough Animal Health business in its merger with the company). Considering that Zoetis, albeit a bit larger, is now worth $16.5 billion that move could pay off tremendously. With well-known companion products such as Frontline and Heartgard and dozens of products for livestock and horses, Merial should continue to grow comfortably in the years ahead.

And finally investors have Elanco, which is smaller but growing like a mangrove tree. Couple its growth with the fact that it represents 9% of Eli Lilly's total sales and it is easy to see why CFO Derica Rice flatly rejected the notion that it would consider a spinoff. Instead, the parent is pushing the company into major growth opportunities in emerging markets. I wouldn't expect the company to grow at a 21% clip for the next few years, but I wouldn't be surprised to see it ascend the list above. 

Forbidden: patent cliffs and insurers
You may question why an animal health business belongs in your portfolio at all. Although margins may be lower than human pharmaceutical businesses there are several key advantages. Animal health companies don't have to face generic competition or deal with pesky insurers -- two of the biggest risks juggled by Big Pharma. It also helps that livestock vaccines represent a relatively small cost for the food industry and pay big dividends for productivity, so farmers don't question their usage.

Foolish bottom line
Unfortunately, investors looking to get into these businesses must invest in their pharmaceutical parents or simply wait for an IPO. There are no current plans for Merck Animal Health, Merial, or Elanco to go public, but I think investors will see these companies sport tickers of their own in the not-too-distant future. If that does happen you should consider an investment. The industry is enormous, growing, and relatively stable. Besides, if Roofus gets sick you'll probably pay whatever veterinarian bill comes your way to get him back into top mailman-chasing shape. It only makes sense to take advantage of these investment opportunities.

One more big advantage: animal health companies get to steer clear of Obamacare, which will undoubtedly have far-reaching effects. The Motley Fool's new free report "Everything You Need to Know About Obamacare" lets you know how your health insurance, your taxes, and your portfolio will be affected. Click here to read more. 


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