Investing in Animal health

Animal health is a multi-billion-dollar market that has undergone rapid growth in recent years and a positive confluence of factors make this a potentially attractive area for investors. The sector is made up of companion animal (pets) and livestock (farm animal) with companies offering drugs, vaccines, medicated animal feeds and diagnostic products. The growing awareness about animal diseases, a greater focus on prevention from disease and increasing regulations provide an attractive set-up for the sector. Further growth is anticipated due to increased pet ownership, higher medical expenditure and increased use of more sophisticated therapeutics and diagnostics.

Compared to human health, animal health experiences shorter and cheaper development timelines, reduced payer complexity in what is largely a cash pay market, less reliance on blockbuster drugs and less exposure to patent cliffs.

The companion animal market experienced elevated growth during the Covid-19 pandemic due to a significant pick up in pet ownership. It has been reported that more than half of the global population has a pet at home, with many owners increasingly viewing pets as a family member - the ‘humanisation’ of pets. Millennials (those born between 1981 and 1996 inclusive) and Gen Z (those born from 1997 onward) have driven the growth in the pet population and are the pet owners more likely to make financial trade-offs to accommodate pet-related expenditures.

An area within animal health that offers attractive growth is diagnostics where utilisation remains low, and vets are increasingly integrating products. Diagnostics helps to give pet owners insights and information on their animals through both reference lab and point of care testing. This offers a valuable insight on the animal’s health status, particularly given pets are unable to speak about their conditions. The space is relatively concentrated with IDEXX laboratories the clear market leader. Zoetis is newer to the diagnostic space having expanded into it with an acquisition in 2018.

The other main segment within animal health is livestock where the drivers are different to companion animal, in part due to the market being more commercial and different owner requirements. Unlike companion animal owners where the animals form more of an emotional bond, livestock owners are farmers looking for cost-effective and sustainable production of safe, high-quality animal protein. The primary motivation is to make money.

The global human population is expected to continue growing, which naturally leads to an increase in food consumption. The proportion of protein is not expected to change materially over the coming decade, with demand for higher quality protein and dairy products set to remain robust. The types of drugs used on these animals are largely those to prevent infection, increase yield and meet regulatory requirements.

While livestock is the larger market, the companion animal segment of animal health is faster growing and typically generates a higher margin.

The animal health market is fragmented with the larger players including Zoetis, Boehringer Ingelheim’s animal health division, Merck animal health, Elanco and IDEXX Laboratories. Zoetis is the largest player in the animal health space with a diversified portfolio that includes fifteen blockbusters (annual sales of over US$100m). The group’s newer products, which includes the first triple combination parasiticide for dogs (Simparica Trio) and monoclonal antibody therapies for the alleviation of osteoarthritis pain in dogs and cats (Librela and Solensia), should contribute to the group continuing to deliver above market growth.

Smaller companies include Dechra, Heska and Phibro Animal Health. Dechra’s portfolio is relatively resilient with around 70% requiring a prescription and whilst the group has no blockbuster products, it has a broad portfolio with a focus on innovation and bringing more novel products to the market as highlighted through an acquisition in 2022 of a company with eight pipeline candidates.

In terms of share price performance, the animal health sub-sector lagged the wider market in 2022 after a strong 2021, due to concerns around the durability of the pet health market. Whilst there may be some volatility in the short term, the animal health sector offers attractive growth aided by two important trends: increased average spend per pet and the growing demand globally for higher quality protein.