Zoetis could do well to split into 2
Animal health industry and financial services professionals tracking quarterly results of leading animal health companies would have experienced a “very predictable and boring” trend of companion animal business units’ increasingly driving revenue growths across companies – large or small.
As the saying goes – once is a chance, twice is coincidence, thrice is a pattern and fourth time must be a solid fact. At AnimalHealthIndia, we are witness to this fact playing over and over again for last 6 or so quarters across companies, and hence this piece.
Companion Animals’ Business – Sustained Growth Driver
Companion animals business all over the world and particularly in US (world’s largest market) outpaces food animals business in growth, attracting R&D funds and as well in returns on investment in marketing.
Increasing pet adoptions, rising footfalls at pet practices, decline in pet euthanasia coupled with growth in vet prescriptions in Q4/2015 and Q1/2016 in US, only reaffirm the underlying strong growth in companion animals segment. And this has important lessons for market leader Zoetis to consider further capitalize on this opportunity.
Maintaining and sustaining innovation (from existing base) may no longer be the only tools to ensure continued market leadership for Zoetis as a clutch of new age, companion animals’ focused firms are challenging the status quo and prospects of yet another mega merger (Bayer AH? - Post Monsanto Acquisition) may have potential to threaten its leadership in food animals.
Imperatives for Split into 2
After years of empire building with multiple, intended and unintended acquisitions (gains from Pharma acquisitions by Pfizer), could this be time for Zoetis to consider a vertical split across 2 businesses: Food Animals and Companion Animals for sharper and smarter focus on respective businesses.
If followed, and at current revenues, both individual entities would still be among Top 10 companies, BUT will surely be much well positioned to gain from individual growth drivers in Food Animal and Companion Animal segments respectively.
Recent numbers (1st Half 2016) of Zoetis only point to narrowing gap in absolute revenues of both the business segments. And the differential in respective growth rates could not be stark, sample the numbers:
With strong segmental growth and demonstrated capacity to grow faster, coupled with opportunity to capitalize fully on the 3 new potential blockbusters (Simparica, Apoquel and Cerenia), Zoetis is in an enviable position and could only do well further to split into 2 distinct entities – Zoetis CA & Zoetis FA
Synergies argument is bunkum
An oft pedaled argument against any business split is – potential synergies from a combined animal health business. However, any one following this industry closely or industry insiders would vouch for growing uniqueness of each, individual segments and fast evaporating synergies, if any.
With different business models, marketing needs and distinct field force & organizational structures – Companion Animal as well as Food Animal segments’ have much less in common than ever before. If anything, an unnecessary and avoidable internal competition for resources only ends up adversely affecting growth opportunities in both individual businesses.
A split could ensure requisite focus on each individual business as a standalone and maximize growth opportunities. Thus ensuring higher individual values for both businesses within Zoetis, maintaining market leadership and delivering much higher shareholder value
Multitude of Species within Food Animals
A split up could as well help address the near anemic growth in Food Animals segment either through increased focus on individual animal species (constituents of Farm Animals Business within Zoetis) or through any additional accretive acquisitions or a combination of both.
Food Animals’ within Zoetis already span 6 unique species namely – Dairy Cattle, Beef Cattle, Poultry, Pigs, Fish and Sheep. For value, these different animal species could well be organized into 2 or 3 business units to fill in the gaps and realize the apparent higher synergies among farm animals’ constituents.
This could also effectively dovetail with the ongoing operational efficiencies improvement plan and accelerate delivery of additional shareholder value
Potential for Further Higher Growth
A split would also help unlock the higher growth segments from current “conglomerate” structure and could lead to higher motivation for individual teams, increased sense of ownership, additional operational improvements and increased competitiveness in the marketplace.
New growth strategy with enhanced management attention on respective businesses has the potential to deliver disproportionately higher returns for patient shareholders as post split, two – 2 Billion+ US $ companies could have much larger market capitalization than the existing one.
With a similar decision expected hopefully, at former parent company – Pfizer by end of 2016, it would only be interesting to watch whether Zoetis will also draw motivation or wait for similar shareholder pressure to walk the path!