Pharmaceuticals giant Pfizer Inc (NYSE:PFE) has been the standard-bearer of the drug development industry for decades. The company has been around for more than a century and a half and is now valued at more than $214 billion.
If you feel like you have missed out on the past 150 years of upside, well, there’s hope — because little-known Zoetis Inc (NYSE:ZTS) will give you an opportunity to own a very similar company — one that’s a tenth of Pfizer’s size, yet is already the dominant player in its niche.
ZTS is the world’s largest producer of medicine for animals. The company develops, manufactures and commercializes medicines and vaccines for livestock and companion animals.
It’s essentially the Pfizer of the animal world. If you care about Fluffy and Rex and your next steak, then you should care about ZTS stock.
The animal health sector is more closely related to human health than you might suspect. According to the United Nations Food and Agriculture Organization, 70% of the new diseases that have emerged in humans over recent decades first originated in animals.
Additionally, seven out of 10 known human diseases are considered “zoonotic,” meaning they can be transmitted back and forth between animals and humans.
This is a health burden on the animal universe that isn’t going away. ZTS has more than 300 animal health product lines serving eight species, including cattle, swine, poultry, sheep, fish, dogs, cats and horses.
Product categories include vaccines, parasiticides, anti-infectives, medicinal feed additives and other pharmaceutical products.
Despite being public for less than three years, ZTS is no new kid on the block. The company’s roots date back to the 1950s, when it was initially a division of Pfizer. In 1952, its bioengineers discovered that one of their human-focused antibiotics proved effective in treating cattle, and thus the precursor to the Pfizer Animal Health division was born.
By the time it was spun off in 2013, ZTS was already a global leader, generating over $4.3 billion in annual sales in 120 countries.
The operations are divided between farm animal and companion animal products divisions, with the former responsible for two-thirds of total revenues. The farm animals segment caters primarily to veterinarians and livestock producers, helping them reduce herd loss with treatments that prevent everything from fleas and ticks to more complex gastrointestinal and respiratory issues.
Zoetis’ growth prospects in this area are expected to be fueled by a growing global population and the expected animal protein and milk constraints that will come about as a result. According to the United Nations, the world will need to double food production by 2050 to feed a global population that is estimated to surpass 9 billion.
Meanwhile, the products in the companion animals segment are directed at improving the quality and extending the life of cats, dogs, and horses. The major growth drivers here are increasing rates of ownership and spending on pets, especially in emerging markets.
These two operating divisions of the company sit at the intersection of several global tailwinds within the $100 billion animal health industry. More importantly, about 20% of that market is animal medicines and vaccines explicitly, the bread and butter — or kibble and bits, if you will — of ZTS.
Additionally, animal health companies have some very clear advantages over their human health counterparts, including very little competition from the generic drug market. This type of pricing power, along with a strong patent lineup shows up in the gross margins, which are north of 64% and among the highest in the industry.
The company is led by chief executive Juan Alaix, who has been in place since ZTS went public. He previously served as president of Pfizer Animal Health since 2006.
Zoetis is a dominant market leader with decided scale advantages over its peers, operating in an industry with clear macro tailwinds. That combination has afforded shares a deservedly valuation, currently at about 25x next year’s earnings. Net income has grew at a 33.5% annual rate the last three years, and shares are up more than 100% since going public.
ZTS stock has pulled back recently and is a decent buy at this level.
Jon Markman operates the investment firm Markman Capital Insights. He also writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX.
