Zoetis: Pure Play in Animal Health

01/03/2017 10:00 am EST


Our latest featured stock is the only publicly traded pure-play animal health and vaccine company and is the market leader in revenue, notes analyst Jacob Kilstein of Argus Research.

We believe that the industry has solid growth potential and that Zoetis (ZTS) will be able to optimize its leadership position.

The company also benefits from broad diversification across product categories and customers, with a wide range of products for cattle, swine, poultry, and companion animals.
The company’s margins have benefited from the lack of generic competition in the animal drug space.

Its lead product, Apoquel, a dermatitis treatment for dogs, generated $110 million in sales in 2015 and management projects long-term peak sales of more than $300 million.

The new product pipeline is also robust, and includes the recently launched Simparica, a chewable flea-and-tick drug for dogs.

We note that Zoetis also benefits from the shorter R&D and launch cycle for animal products, which can be tested more quickly than human drugs.

During the third quarter, Zoetis received U.S. approval for additional swine vaccine combinations and Mexican approval for a reproductive and respiratory vaccine for swine. It also received approval for combination bovine vaccines in Canada and Japan.

On August 8, Zoetis purchased Micro Biodevices, a Danish provider of veterinary diagnostic tests, for $80 million. Also during the quarter, Zoetis gained approval for diagnostic test kits in several overseas markets.

Zoetis has expressed interest in making additional acquisitions similar to its purchase of Pharmaq, a fish vaccine company, and the Animal Health business from Abbott (ABT).

Zoetis may also be an acquisition target in its own right -– perhaps from Bayer (BAYRY), which specializes in veterinary drugs. In June, Valeant Pharmaceuticals (VRX) approached Zoetis with a buyout offer, but the deal fell through.

We like ZTS shares based on our expectations for strong sales of Apoquel, the newly launched Simparica, the recent approval of Sileo, the company’ s international expansion plans, the progress of its restructuring program, and contributions from the Abbott acquisition.

We think that ZTS shares are attractively valued at current prices near $53. Our rating remains BUY with a revised target price of $60.

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