Zoetis: Healthcare for Pets

09/21/2020 5:00 am EST

Focus: HEALTHCARE

Eddy Elfenbein

Editor, Growth Stock Advisor

The most alluring quality of the pet industry for investors is consistency. Americans are expected to spend $75 billion on pets this year, including $16 billion on health supplies and medicine, observes Eddy Elfenbein, editor of Growth Stock Advisor.

The global market for animal health products was worth $47 billion last year and was forecast to advance at an average of 5.8% a year through 2027, reaching $73.6 billion, says Grand View Research.

Better care has extended life expectancy, especially for dogs. That boosts the demand for drugs for cancer and chronic ailments such as osteoarthritis, with more owners willing to pay for what vets recommend.

That is great news for a company like Zoetis (ZTS), the world's largest pure play animal health and vaccine company. The company should be able to optimize its leadership position.

It has a wide range of products, including anti-infectives, vaccines, medicated feed additives and other pharmaceuticals for cattle, swine, poultry, sheep, fish and companion animals. These include some meds developed from advanced monoclonal antibodies.

This broad diversification enables Zoetis to offset any temporary weak sales in one segment with stronger sales in others. Furthermore, nearly half of the company's revenues are generated internationally. Its global infrastructure gives Zoetis a big cost advantage over its peers.

Zoetis also is different from human drug firms in that it benefits from a relatively short R&D and launch cycle for animal products, which can be tested more quickly than human drugs. Pets, or “companion animals,” now provide 45% of Zoetis’s revenues (the rest is from livestock).

And blockbuster drugs such as Cytopoint, an immunotherapy treatment for dog dermatitis, are common. At least 20% of the firm's revenue comes from pharma products protected by patents that both allow Zoetis to charge a premium price and insulate it from competition.

Zoetis continues to expand its business lines too. The company recently sealed a deal to grow its animal supplements business through the acquisition of Platinum Performance, a manufacturer of nutritional products for horses, dogs, and cats.

Thanks to impressive strength in its U.S. animal companion business (it grew at an 18% rate), Zoetis reported second quarter results that exceeded expectations on August 6. It has now exceeded consensus forecasts for earnings and revenue for 14 consecutive quarters!

This is the type of a company that you should always look for. Zoetis consistently beats expectations and has a fairly strong moat around its business. Rivals will find it hard to displace the company from its number-one position globally in animal medicines and vaccines.

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