Zoetis/Elanco: pandemic pet boom brings out the animal spirits

Lockdown loneliness created unprecedented demand for four-legged friends during the pandemic. Almost 13m households in the US got a new pet between March and December last year, according to the American Pet Products Association.

Animal health companies, which make products ranging from flea collars to deworming medicine and pet vaccines, have emerged as particularly big winners. Zoetis and Elanco Animal Health, the industry’s two biggest standalone players, both raised their full-year sales forecasts this week after reporting strong third-quarter results.

Unlike pet foods, where there are always cheaper brands to trade down to, animal vaccines and medicine are not something doting pet owners will skimp on. In economics parlance, it is sticky spending.

Since it was spun out from Pfizer in early 2013, shares in Zoetis have climbed to $216 from their $26 IPO price. The stock is up a third this year alone, to give the company a $102bn market valuation. Elanco, itself spun out from drugmaker Eli Lilly in 2018, is smaller, with a market cap of just $16bn. But it has been bulking up through a series of acquisitions, most recently buying Bayer’s animal-health unit in 2019. The stock is up 15 per cent this year. Yet at 30 times forward earnings, it trades at a discount to Zoetis, which is on a multiple of 45 times.

This gap is understandable. Zoetis is the safer bet. The company is not only bigger, it is also more profitable. Its ebitda margin of 43 per cent is almost twice that of Elanco. That is because, unlike Elanco, Zoetis is less exposed to the livestock medicine market. It gets about 38 per cent of its revenue from livestock drugs, compared with about 50 per cent at Elanco. Pushback by consumers and regulators against the use of antibiotics in food products has hurt demand.

Zoetis’s strong positioning in the companion animal market means sales continue to have room to run. Investors should lap up the shares while they can.