Zoetis – Z to A of Leadership in Animal Health!
Animal Health Industry has been undergoing a disruptive change. But many of the industry insiders and players, since they are so close to the data and have so much of data at hand, have consistently missed out the big picture, barring a few.
Take the case of threats from disruption and how industry insiders usually react to these. They may not be able to clearly see what’s coming. Here are a few clues:
· This “telephone” has too many shortcomings to be seriously considered as a means of communication – William Orton, Western Union, 1876
· “Television won’t be able to hold on to any market it captures, after the first 6 months” –Darryl Zanuck, 20th Century Fox, 1946
· “The Americans may have need of the telephone, but we do not. We have plenty of messenger boys” – William Preece, British Post Office, 1876
Why does this happen. Well part of the reason for this could be commitment bias. And part could be “Boiling Frog Syndrome” – failure to notice, slow, gradual erosion in one’s competitive advantages – because of excessive focus on daily, weekly and quarterly quotas and goals.
Our AH Industry is in midst of this disruptive change and exceptionally you come across organizations and leaders who are not only prepared but actually – “overprepared” for this change & disruption.
Zoetis has effectively lead and continues to thrive on disruption to cement its leadership in animal health industry.
Managing Transition – Creating Extraordinary Shareholder Value
A little bit of history first – since transition from ‘part of conglomerate’ in Feb 2013 – Zoetis has come a long way and created many firsts not only in AH Industry. Sample a few:
· Comparison with Parent -Pfizer
Within 5 years of its IPO /listing on exchanges – Zoetis is way ahead of Pfizer in “like to like” comparisons such as: respective industry market shares, P/E multiples and respective annual growth in revenues. Zoetis has outperformed Pfizer since 2014 and holds more value in eyes of shareholders than its parent, Pfizer so much so that market cap of Zoetis is actually higher than overall size of AH Industry. For Pfizer to achieve this feat – its market cap needs to exceed USD 1 Trillion.
In our opinion at AHI – this relative outperformance and higher shareholder value is on account of twin treats: 1) future proofing its portfolio (more on this later in this write up) and 2) relentless pursuit of operational efficiencies though initially driven by shareholder activism.
· Comparison with Industry Peers
As per 2017 Animal Pharm AH Industry Rankings – Zoetis has little over USD 900 Million lead in revenues over 2nd placed competitor (Boehringer Ingelheim AH) and almost USD 1.5 Billion over 3rd placed Merck/MSD Animal Health. This kind of gap could potentially be bridged only by a significantly sized acquisition but Zoetis is already way ahead at this game which in part is reason for its outperformance.
So much is extent of Industry dominance that Zoetis’s recently announced “only” Q2’ 2018 (1 quarter) revenues are equal or significantly higher than annual revenue figures (though of 2017) of No. 6, 7, 8, 9 and 10 ranked companies in AH Industry.
We believe that this dominance may continue and actually accentuate once the full impact of recent acquisitions kick in for Zoetis.
Market leadership – Via OLA (Own developments, Licensing & Acquisitions)
Its no denying that Zoetis had a great start under Pfizer as significant portfolio gains accrued on account of pharma acquisitions by Pfizer namely Wyeth (Fort Dodge), Pharmacia and King Pharmaceuticals among others.
However, since its IPO in 2013 – Zoetis has perfected the art of “filling portfolio gaps” either by in-licensing or by acquisitions. Its philosophy of “if you can’t beat them – buy them” has resulted in continued out-performance.
Animal Health Industry allows access to multiple animal species across multiple therapeutic segments and Zoetis currently has enviable presence across breadth and depth of animal health industry primarily through intelligent business development.
From acquisition of animal health assets of Abbott to K L products to a strategic acquisition of Pharmaq (specialty Aquaculture player) to Nextvet and to more recent Abaxis (veterinary point of care diagnostics company), coupled with licensing deal with Regeneron Pharmaceuticals for monoclonal antibodies – all these have brought in much desired diversity in its portfolio and have positioned Zoetis even more attractively for future.
In contrast – majority of other AH players have so far only been content watching interesting assets being lapped up and left play a delayed catch up e.g. Aqua vaccines, mAbs etc. While Zoetis keeps us busy discussing its various deals, business development team may well be working on newer ones. And this holds important lessons for other AH companies.
Operational efficiencies – Key to future investments
To bankroll OLA deals (Own developments, Licensing and Acquisitions) strong balance sheet is a pre-requisite and pursuit of operational efficiencies coupled with revenue growth have done the magic for Zoetis.
Sample this – in recently announced Q2’ 2018 and 1st Half of 2018 results – Zoetis has recorded revenue growth of 11% (1st Half; 12% for Q2’ 2018) but Net Income growth of 52% over same period of previous year 2017. So much so that Zoetis commands No 1 position in Net Sales, in profitability and also 1st rank in business growth rate - a feat that may be difficult to match or exceed.
From rationalization of portfolios (from 13,000 SKUs to less than 8,000 now) to manpower across geographies (disbanding Ruminants / dairy sales team in India) to increased focus on high growth, high value brands (Apoquel, Cytopoint and Simparica) continue to deliver dividends for Zoetis.
Surely this relative out-performance in stock price with Pfizer and in business performance with AH industry peers may and could change in future. It also is possible that a couple of large companies could merge and create a bigger player, however, we believe that this stellar performance by Zoetis is likely to continue on account of:
Diversity in portfolio, deeper market penetration and cost rationalizations
Focus on high growth areas such as potential expansion of opportunities with mAbs (from existing derma to osteoarthritis / pain to oncology to even otential uses in livestock segment) and veterinary point of care diagnostic services and lastly
Timely investment in harnessing value through sensors, digital technologies, data analytics and applications in Animal Health e.g. a recent but relatively small acquisition of SmartBow in Austria could add disproportionately higher value in precision farming
These we believe will ensure Zoetis may remain market leader far longer than comfort of competitors.
Disclaimer: We don’t have any of our own dogs in this fight (don’t own any stocks in any of the companies and nor are we getting paid for this write up from any of companies mentioned).