The No. 1 “Pet Biotech”
We use the products and like the stock ...
A couple of weeks back, my wife Robin and I were out for our midday walk with our black-and-white pooch Chase – and noticed that he was “huffing” and flicking his ears with an energy that bordered on violent.
We’ve seen this before.
We adopted the warm-and-rambunctious Border Collie mix back in September 2018 – not long after we lost my Dad. It was a tough time, and Chase helped fill some of the massive chasm – especially for our then-pre-teen-son Joey.
Poor Chase spent some time living on the street before he came into our lives. And from the bumpy scars that are easy to feel under the fur on his floppy ears, he seemed to have a rough time of it.
That scarring makes him super-susceptible to ear infections. Every spring – and every fall – he gets one. So every spring – and every fall – I help him into our Ford, and drive him to a vet appointment for an ear cleaning, and a couple of prescriptions – including one for the Zoetis Inc. (ZTS) allergy drug Apoquel.
The Parsippany, N.J.-based Zoetis is a company that I’ve followed for years – as a stock picker, and a guy whose family always has multiple pets. I even wrote about it – and recommended the stock – in my previous investing service, a newsletter I ran for more than 10 years.
Back then, I dubbed it the “Pet Biotech” – and watched my subscribers benefit as that stock tripled in price.
Now I’m introducing Zoetis to you – as a company with “Wealth Builder” potential.
A Terrific Lineup
Investing legend Peter Lynch always told folks to “invest in what you know.”
That’s what I’m talking about with Zoetis.
At the time we adopted Chase, I’d already put the stock on my “Buy” list.
And then I became a loyal Zoetis customer.
When Chase joined the Patalon household, we already had a bunny rabbit named Houston. And we’d soon adopted a neighborhood cat Oreo (aka “Kitty”).
All three pets had the same “paint job” – meaning all three were black and white in color. And all three would end up using (and benefitting from) Zoetis drugs.
We had to use several medications to treat the maladies Chase picked up on the street, in the kennel and in foster care. And others to keep him healthy. And we’ve used one or two others in the years since. Most were Zoetis therapies, including:
Cefpodoxime, an antibiotic the vet gave us to treat his surgical wound from being fixed.
The afore-mentioned Apoquel, a monoclonal antibody that treats dermatitis and other allergy-related maladies.
Simparica Trio, for protection against heartworm disease, ticks and fleas, roundworms and hookworms.
Synotic Otic, for treating ear infections.
And Cerenia, which he needed to counteract car sickness until he got a bit more used to vehicle travel.
Turns out, we weren’t done. We ended up using RevolutionPlus, a parasite-protection medication, on Oreo. And another Zoetis-made drug on Houston.
No surprise that the $78 billion (market value) Zoetis holds the No. 1 market share spot in the pet pharmaceuticals market – both here in America and globally. It’s a market that’s projected to grow from $15.35 billion in 2022 to $23 billion in 2028.
Some analysts are forecasting a jump to $30 billion by 2030.
Why It’s a “Wealth Builder”
Zoetis shares have generated a total return of more than 500% since its 2013 spinoff from Pfizer Corp. (PFE). But at a recent price of about $164, Zoetis is down about 18% from its 52-week high.
Right now, analysts have a $225 target price on the stock – a 36% gain from where it’s been trading.
I actually like it longer-term – as a Wealth Builder stock.
And the numbers support that view.
With its drugs, vaccines, diagnostic offerings and medicated additives for feed, Zoetis can serve both pets and livestock with 300 product lines. I talk all the time about the importance of “blockbuster” drugs in biotech. Zoetis has 15 of them – each generating more than $100 million a year.
But Zoetis will keep growing – it will continue to gain market share through its current offerings and will also build a lead in a hot new segment for pet arthritis (which I’ll talk more about in a minute).
Here’s how the company’s business breaks down:
The U.S. market (53% of sales last year): Dogs like Chase and cats like Oreo accounted for 73% of sales. The rest is cattle (16%), horses (4%), poultry (4%) and swine (3%).
The overseas market (46% of revenue): Outside U.S. borders, we’re talking about dogs and cats equal (49%) of revenue, cattle (20%), swine (11%), poultry (9%), fish (6%), horses (3%) and sheep (2%).
On an overall basis, Zoetis is No. 1 in North America, Latin America and Asia. And it’s No. 2 in both Eastern and Western Europe.
But the stock market is a “what-comes-next” playground. And for Zoetis, the “what comes next” is a promising drug.
Easing the Pain
Zoetis received the first U.S. Food and Drug Administration (FDA) approval for its monoclonal antibody drugs to treat osteoarthritis (OA) in cats (2022) and dogs (2023). This is a significant step-change over giving nonsteroidal anti-inflammatory drugs (NSAIDs, or ibuprofen, to you and me) to pets.
These new treatments – Solensia for cats and Librela for dogs – could eliminate a lot of pain felt by our furry friends.
Here in the U.S. market, maybe 40% of dogs and cats suffer from some degree of OA – and the pain it creates. But because NSAIDs can cause stomach problems and kidney or liver damage – and because there are only a couple that are FDA-approved for animals – many of our furry friends can go untreated.
Zoetis execs have told investors these new drugs should grow to peak sales of more than $1 billion – joining its skin and parasite therapies as $1 billion-a-year blockbusters.
The company also says the renal, cardiology and oncology markets for pets will triple in size by 2032, meaning there are three other pathways for its scientists to pursue.
Pet Inflation
Given what we’ve been looking at here, it’s not a surprise that pet ownership can get expensive. And those new technologies figure to make it even more so.
More than a quarter (26%) of Americans surveyed by USA Today in February said they spend $51 to $100 a month on their dog. An equal number (26%) spend between $101 and $250 per month on dog care, the survey found.
It’s another inflationary assault, says a new report from the U.S. Bureau of Labor Statistics (BLS), which finds that pet-related expenses are grabbing an increasing slice of consumer budgets. Those outlays have surged nearly 78% - growing from $57.8 billion in 2013 to $102.8 billion in 2021. During that same stretch, yearly incomes have increased about 46%.
Zoetis has an answer for that, too.
In 2020, Zoetis launched Pumpkin Insurance Services Inc., a preventive care and pet insurer that’s grown and now provides coverage to more than 65,000 U.S. pets. In a review last year, MarketWatch said Pumpkin “makes good on its promise to provide comprehensive care.”
Pumpkin offers accident-and-illness insurance plans. And it works with veterinarians to create an array of “wellness” offerings to keep dogs and cats healthy – treating them for hereditary conditions, behavioral problems, dental illnesses, sick visit exams, pet ER visits – and even alternative treatments like acupuncture.
Last May, Zoetis sold a majority stake in Pumpkin to JAB Holding Co., a brand-investment company that has invested in various companies throughout its history like Keurig Dr. Pepper Inc., Krispy Kreme Inc., Panera Brands Inc., Caribou CoffeeEinstein Bros. Bagels and Bally.
It also has controlling stakes in National Veterinary Associates, one of the world’s largest animal care services platforms; Independence Pet Group, a leading pet insurer in North America; and Pinnacle Pet Group, a leading pet insurer in Europe.
I love this deal for Zoetis.
JAB’s pet insurance ventures have more than 3.3 million pets enrolled. But Zoetis is keeping a minority stake and a “commercial partnership” in the venture. The combined partnership has “scale.” And it gives Zoetis an inside track on prescriptions since the insurers can decide which drugs will get “coverage” and reimbursements.
Telling Figures
The Zoetis story is strong.
So are its numbers.
In its last quarterly report, earnings grew but fell short of forecasts. But revenue advanced 8% to hit $2.21 billion, beating the expected top line of $2.19 billion.
For full-year 2023, Zoetis reported better-than-forecasted revenue of $8.54 billion. Adjusted earnings per share came in at $5.32 – up from $4.88 in 2022.
For 2024, Zoetis is projected to deliver adjusted per-share earnings in the range of $5.74 to $5.84. And revenue is expected to come in at $9.075 billion and $9.225 billion.
There’s room for more.
Take Zoetis’ return on invested capital (ROIC) – a measure of how well its capital is being used to generate profits. For Zoetis, the ROIC is 20%, which makes it a top-quintile S&P 500 company. Over the last 20 years, companies in the top fifth of this metric, as a group, are big outperformers.
Zoetis also boasts a net profit margin of 27%. And it has a shareholder focus. Over the past 10 years, the company has repurchased about 1% of its shares a year. And it’s boosted its dividend.
The company right now pays $1.73 a share in dividends – for a yield of about 1%.
Zoetis is the kind of Wealth Builder company I look for to share with the readers of Stock Picker’s Corner (SPC).
And I know that Chase is happy it’s around.
He feels better.
