Innovative Investments in Animal Healthcare

Includes: PETS, SGP, WOOF
by: Mike Havrilla

The worldwide market for animal healthcare, excluding bulk feed and nutrition products, is expected to reach just under $20 billion in 2008 based on statistics cited in a recent SEC filing by AspenBio Pharma (APPY) (which I have written about previously), experiencing growth of 26% from a level of $15.6 billion in 2003. Animal healthcare is dominated by several large and mega-cap global pharmaceutical companies, which either have distinct operating divisions from acquisitions or joint ventures focused on this niche area of pet and livestock medicine.

Compared to the market for their human counterparts, the animal healthcare industry generally experiences less competition and requires fewer resources in the form of time and money for drug development.

Schering Plough (SGP) is poised to be the leader in the animal healthcare space after its acquisition last year of Organon BioSciences, including its Intervet division, with annual health sales of just under $2.5 billion for the combined entity. Industry analysts note that profit margins are typically higher for veterinary drugs and the growth outlook is more robust as compared to the highly competitive market for human medications.

Whereas animal health revenues typically represent about 5% of total revenues for big pharma companies involved in the space, Schering-Plough will now have over 20% of its revenue tied to the niche space, demonstrating its confidence in the growth and profit prospects for the industry.

To create an exchange-traded fund and index to track the global animal healthcare industry, I developed a stock selection with several screening criteria based on each company’s animal healthcare pipeline, percentage of revenues from animal health, and overall revenues from animal health. I also expanded the selection parameters to include companies providing retail services to pet owners such as PetMed Express (NASDAQ:PETS) and veterinary care services such as VCA Antech (NASDAQ:WOOF). A total of 26 stocks from global markets were eligible for the fund, with the top 22 selected with a minimum market cap of $200 million and an average market cap of $36 billion. Over the last 52 weeks, my global animal healthcare ETF outperformed the overall market with a return of about 11%.

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