Zoetis (ZTS), the animal health unit from Pfizer (PFE), has officially been priced for its initial price offering. On Thursday night, Pfizer sold 86.1 million shares at $26 for a total offering of $2.24 billion. The valuation from the IPO gives Zoetis a market valuation of $13 billion. Shares priced above their initial range of $22-$25.
The new public company has a 60 year history in animal medicine. Zoetis has grown through acquisitions and is the largest of its kind in the world. Zoetis competes with other large pharmaceutical companies that have animal health units including: Merck (MRK), Sanofy (SNY), and Eli Lily (LLY).
Zoetis has over 300 products with sales in 120 countries. The company's two segments are livestock and companion animals. Livestock contributed 66% of the most recent fiscal year, while companion animals made up the remaining 34%.
One of the company's key strengths is its presence in emerging markets. Growth in food consumption is leading to larger animal populations in several new countries. In 2012, emerging markets made up 27% of sales. By region 2012 sales were:
· United States: $1.7 billion
· Europe/Africa/Middle East: $1.1 billion
· Canada/Latin America: $0.8 billion
· Asia/Pacific: $0.6 billion
Zoetis' strengths include:
· Global leader with scale and scope
· Established direct presence in emerging markets
· Diversified product portfolios
· Leader in direct sales and marketing with strong customer relationships
· Leader in product development
· High quality products delivered reliably by our world-class manufacturing operations
· Dedicated employees and experienced management team
· Track record of strong top-line revenue growth and significant cash flow generation
Growth plans for the future include:
· Direct local pressure
· Penetrate emerging markets
· New product development
· Remain partner of choice
· High quality products and high margins
· Complementary businesses including diagnostics, genetics, and dairy data management
In the first nine months of fiscal 2013, Zoetis has recorded sales of $3.2 billion. Net income over that period has been $482 million, which is a 27% increase from the prior year's nine months. In the past two years, sales have grown 18% and 30%, respectively.
Animal medicine is different from large pharmaceutical companies and offers several key benefits including:
· Faster research and development
· Diverse product portfolios
· Self paying customers, less insurance companies to deal with
Zoetis will pay a quarterly dividend of $0.065, representing an initial yield of 1%. I expect this to raise at least within the next year. To me this offering is similar to when Bristol Myers (BMY) spun off Mead Johnson (MJN). The move was done to separate businesses to flourish on their own. Pfizer has done this in similar fashion to separate the animal business and allow it to grow on its own through acquisitions and internal growth. Since that time, shares of Mead Johnson are up 154% in just shy of three years.
The animal health sector is growing and represents good growth for shareholders. According to Vetnosis research, compound annual growth in the sector is expected to be 6% from 2011-2016. Zoetis breaks down reasons for higher demand among its two key segments:
· Human population growth
· Demand for nutrition and protein
· Scarcity of land
· Focus on food safety
· Disposable income in emerging markets
· Increased pet ownership
· Animals living longer
Pfizer was one of my top ten stocks for 2013, with the Zoetis spin-off being a big reason. In my three reasons, I listed the Zoetis spin off as a big reason to buy shares. The other two were dividend yield/share buybacks and the drug approval of Eliquis. Since the start of the year, Pfizer shares have risen 8.8%. The positive pricing of Zoetis along with the spin-off to existing shareholders will send shares higher in the next trading week.
Pfizer sold its nutritional business to Nestle for $11.85 billion. The sale was one of a similar fashion as the Zoetis IPO. Pfizer is focusing on its core businesses and also trying to free up cash to use for acquisitions and research and development. Some of the money from the IPO will continue to be used in share repurchase programs.
I recommend buying shares of Zoetis at the IPO under $30 and continue to recommend shares of Pfizer going forward.