By Cornelius Zeeman and Janco du Toit,
Fairtree Portfolio Manager and Equity Analyst
Animal health refers to the treatment and care of animals to prevent or combat diseases. This field encompasses two main categories of animals: livestock, used for consumption and productive use cases, and companion animals, such as pets, which provide fellowship and companionship to humans.
Animal health vs. human health.
One of the key advantages of animal health research over human health research is its quicker and more cost-effective development process. Clinical trials can often begin earlier in the “target species”, compared to human health, allowing for faster safety assessments and trial completions. Additionally, animals’ shorter lifespans contribute to the expedited pace of research and development.
Graph 1: Efficiency of animal project lifecycles vs. human health
Source: Morgan Stanley
Several product lifecycle management strategies extend the commercial life of developed drugs in the animal health industry. These strategies include broadening the target species population, alternative drug combinations and new dosing methods.
Another advantage for animal health is the lower competition from generic drugs compared to human health. This is partly due to the lower potential payoff, as animal health blockbuster medicines have a smaller market opportunity, compared to human medicine. Diffused distribution networks, which require sophisticated sales teams, act as another barrier to entry. Additionally, the animal health market primarily operates as a cash market, minimising third-party payer risks.
Demographics.
Animal health benefits from changes in both human and animal demographics. For example, as the global human population rises and wealth increases, the demand for livestock and protein consumption also grows.
Graph 2: Meat supply vs. GDP per capita
Source: Our World in Data
The companion animal market benefits from a growing global pet population, as well as increasing pet ownership. The humanisation of pets, coupled with improved living standards and healthcare, has led to an ageing pet population.
Graph 3: US average annual net increase in pet population
Source: Idexx
Graph 4: US average pet patient lifespan
Source: Idexx
As with human health, healthcare spending for pets also increases with age, as shown in Graph 5. As pets grow older, they often require more medical attention for age-related conditions. This leads to a rise in veterinary visits, treatments, and medications. Owners are often willing to invest in quality care to ensure their ageing pets remain comfortable and healthy in their later years.
Graph 5: Average practice revenue per active patient by age segment
Source: Idexx
Overview of the three largest players.
Zoetis:
Zoetis is the largest and most diversified animal health company, holding market-leading positions across multiple therapies. No single product line accounts for more than 10% of total revenue. The company has an impressive management team and has consistently been able to outgrow the animal health industry. Their revenue has grown by 8% p.a. over the past seven years while maintaining a return on invested capital close to 20%.
Idexx:
Idexx is a high-quality, high-growth animal health company with a market-leading position in companion animal diagnostics. Idexx dominates the market in point-of-care diagnostics and reference lab diagnostics in the US. The company has a strong track record, with 80% of its revenue being recurring due to long-dated contracts. These favourable characteristics do, however, come at a price, with Idexx being the most expensive on a relative basis compared to its peers. They trade on a forward price-to-earnings ratio of 43x compared to Zoetis’ 26.5x.
Elanco:
Elanco is a company in transition, struggling with its high debt from its 2020 acquisition of Bayer Animal Health. Elanco pursued Bayer for their companion animal franchise, as it is the fastest-growing and most profitable portion of the animal health market. Successful integration has taken longer than what market participants have been hoping for. The recent sale of its aqua business should help reduce debt, while the successful execution of three potential drug launches later this year will be crucial for its recovery.
Conclusion.
The animal health market presents a compelling opportunity within the healthcare industry. While it shares similar characteristics with human health, it boasts unique end-market dynamics that offer attractive investment opportunities. Thorough analysis and selection can help prevent investors from sleeping in the doghouse.
Disclaimer:
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