Divestitures and Consolidation in Animal Health Market Present Opportunities to Investors, Innovators

The business of animal health has traditionally been dominated by the animal health divisions of big pharma companies. But with Pfizer’s 2013 spin-off of its animal health business, now known as Zoetis, the sector has been undergoing fundamental changes that create new opportunities for investors and innovators.

The success of the Zoetis $2.2 billion IPO, at the time the largest since Facebook, helped inspire the spin-off of Eli Lilly’s animal health business, Elanco, last September, which surged 41 percent on its debut. And, late last year, Bayer announced its intention to leave the animal health business.

In addition to the spin-offs, or in part because of them, there has been substantial consolidation in the animal health space. In 2014, the company that became Elanco acquired Novartis Animal Health. Two years ago, Boehringer Ingelheim acquired Merial, Sanofi’s animal health business, making it, at the time, the second-largest animal health company in the world.

With Bayer’s eventual divestiture, three of the five largest animal health companies—Zoetis, Elanco and the Bayer unit—will be independent companies. Rounding out the top five are Merck Animal Health and Merial (Boehringer Ingelheim), which remain divisions of their big pharma parent. And animal health players are expected to continue to seek acquisition opportunities, such as Merck’s purchase of animal health company Antelliq in December 2018 for $2.4 billion.

Demographics Drive Growth

Citing the Animal Health Institute data, The Balance reports that spending on animal health medicine globally is about one-fortieth of that of human health, but the pet market is growing much faster. The global companion animal healthcare market is expected to grow at an annual rate of 4.5 percent CAGR through 2024.

The market for animal health consists of two sub-sectors, companion animals and livestock, that respond to different market forces.

The pet industry is thriving and pet owners are willing to open their wallets to spend on their furry friends. The number of companion animals increases with income levels and the percentage of smaller families. Aging populations also corelate with higher percentages of pet ownership. In the U.S., 68 percent of families reported they owned a pet in the 2017-2018 APPA National Pet Owners Survey. That figure is up from 58 percent in 1988, the first survey year.

Pet owners are increasingly humanizing their pets and, as a result, are more willing to invest in their animal’s health and well-being. Owners are opting for more advanced healthcare for their pets such as hip replacements, stem-cell therapies and physical therapy.

The market for livestock-related animal health is growing in response to concerns about zoonotic diseases (those which can be transmitted from animals to humans), management of disease outbreaks in large-scale farming operations, and the need to increase livestock productivity to meet the increasing global demand for meat.

In 2018, livestock accounted for approximately two-thirds of the global market for animal health, with companion animals accounting for the remaining third. However, in recent years, in the U.S. about 60 percent of the spending on animal health has gone to companion animals.

Consolidation Drives Innovation

As animal health companies consolidate, they often face cost-cutting demands that put pressure on R&D spending. As has happened with the larger pharmaceutical industry, the leading animal health companies are looking to startups and collaborators for innovation. And innovative new companies are bringing the same technologies that are transforming human health—such as biotech, genomics, AI, cloud computing and big data—to animal health.

The market for animal health in developed countries is expanding to include wellness tools that can monitor and collect data on both companion animals and livestock. Connected wearables can alert pet owners or farmers to animals with emerging health issues. Telemedicine tools will give farmers access to veterinary care as well as spare cat parents from enduring trips to the vet with a yowling feline in a pet carrier. Other monitors can track an animal’s feeding pattern for cues to health issues.

Technology companies are also targeting the animal health market with the same kind of practice management, electronic health records and patient engagement solutions that are becoming common in human healthcare clinics.

Where’s the Money?

Looking back at the past three years of PitchBook data, we found 87 private investments in animal health or related companies from around the world, including the United States, Canada, Germany, the UK, China and the Philippines. Twenty-three of those rounds went to companies making therapeutics or vaccines for companion animals. On PitchBook’s list of animal therapeutics or vaccine developers is a broad range of drug and other treatment developers, including for oral vaccines to prevent Lyme disease transmission, gene therapies for animal cancer and diabetes treatments. Twelve investments have focused on oncology-related testing or therapeutics for animals.

Companies that indicated they produce therapeutics for both animals and humans received 16 investments in the past three years. Sixteen rounds also went to companies developing information technology for vet practices.

The vast majority of investments went to animal health-related service companies, medical device and monitoring companies. The remaining investments went to companies developing products for the livestock market.

The total investment reported over the three years was $438 million. One deal, a $223 round, went to Vets First Choice in July 2017. The provider of practice management software for veterinarian practices took in more than half of the total reported private investments in animal health in the past three years.

Only two other rounds were valued at more than $20 million. Vetsource, a service company that provides an online home delivery pharmacy as well as a tool that integrates with veterinarian offices’ practice management software, took in a round of $50 million in June of 2018. And Recombinetics, a gene editing technology company for human health as well as animal agriculture and livestock markets, received an investment of $39.87 million.

Looking Ahead

Mergers will likely continue in 2019 if the first quarter is any indication: Vets First Choice completed its merger in February with Henry Schein Animal Health, a spin-off from healthcare product distributor Henry Schein. The new company name is Covetrus.

The industry flux coupled with growing spending on pets make for interesting opportunities for investors and startups alike.

Originally published May 16, 2019 on Fenwick's Life Sciences Legal Insights blog.