Pets and Protein: Opportunities in Animal Healthcare

Delwin Graham - Jul 18, 2018
The U.S. healthcare sector has outperformed over the past five years due to strong demand from investors seeking companies with reliable earnings growth.

The U.S. healthcare sector has outperformed over the past five years due to strong demand from investors seeking companies with reliable earnings growth.  Whereas valuations are pushed to high levels, investors have been looking towards the animal healthcare sector as a continued source of steady earnings growth.  There are nuances, however.  Animal health is an industry driven by two sectors, pets and livestock, that respond to very different market forces.

On the one hand, human population levels continue to rise across the world.  Not only are there more mouths to feed, but a greater percentage of the world’s population is entering the middle class which implies a diet that is more focused on animal proteins like beef and pork (Cf., George M. Lee, “The Growing Business of Animal Healthcare”, April 13, 2015, www.Valueline.com).  Figures from the Canadian Consumer Price Index indicate prices for meat, poultry and eggs are up roughly 23 percent since 2010.  Leading the way is beef, which has grown 50 percent over that span.

Farmers have rushed to take advantage of these favourable pricing conditions.  In an effort to push margins, farm animals are often crammed into tight quarters that facilitate the spread of viral and bacterial diseases.  Vaccines are made available, but a relatively poor understanding of animal viruses and the high likelihood of mutations mean that epidemics are always a threat.

The growing reliance of factory farms on antibiotics and vaccines must be counterbalanced with the widening consumer demand for their reduction or elimination in raising livestock.  Mainstream industry players like Maple Leaf Foods Inc. (MFI:TSX) in Canada and Purdue Farms in the U.S. have responded to this shift.  The organic and free-range movement promises to bring responsible and sustainable practices to livestock farming; however, its ability to keep up with the exponential growth rate of the human population is certainly in question.

If the livestock segment of health is being driven by a growing global demand for animal protein, the pet segment is responding to the need for animal companionship.  In the United States, according to the APPA National Pet Owners Survey, 68 percent of households now own a pet, up from 58 percent when the survey started in 1988 (Cf., Michael Helmstetter, “Three Trends that will Transform Animal Health”, July 27, 2017, www.Techaccel.net).  Not only do more people own pets, but they are spending more on them, with total U.S. pet industry expenditures projected to rise by almost US$3 billion to just over US$69 billion in 2017.  Today 60 percent of the revenue of U.S. animal-health companies comes from companion animal products, and 40 percent from livestock products.  These proportions are reversed in the rest of the world.  Americans are willing to spend heavily on the health of their pets because they are looking to help them live longer, happier lives.

These two trends, that is, the global demand for animal protein and the growing need for animal companionship, continue to drive the expansion of the now US$24 billion animal healthcare market.  How can we profit?  Not only is the sector dynamic, it is also new.  In the past, what we now call the animal-health industry was contained within the corporate divisions of the larger pharmaceutical companies.  That was until Zoetis (ZTS:NYSE) was spun out by Pfizer in 2013 at US$2.2billion, the largest IPO since Facebook.  At present there are several large animal-health companies generating multi-billion-dollar revenue.  However, like big pharma, these companies are increasingly outsourcing their innovation to start-ups in response to a reduction in R&D spending.  The animal healthcare ecosystem is growing and dynamic.  Please contact me (Delwin.Graham@canaccord.com; 780-408-1518) for more details and a few actionable ideas.