Tuesday, May 19, 2009

Animal Health Care News and Forecast

Consolidation in big pharma is changing the landscape of the companion animal health market. Merck (NYSE:MRK) and Schering Plough (NYSE:SGP) will combine their respective animal health companies Merial and Intervet. Pfizer's (NYSE:PFE) acquisition of Wyeth (NYSE:WYE) includes Fort Dodge, which combined with Pfizer Animal Health would form the largest animal drug provider in the world. According to Pfizer's first quarter 2009 results, the company has "had productive discussions with the [FTC] regarding the possible divestiture of some animal health products." So it seems part or all of Fort Dodge may be for sale.

What do these mergers mean for growth in veterinary services and pet care spending? Competing products may disappear, jobs may be lost, and supply chains may be disrupted. For instance, in fiscal year 2008, MWI Veterinary supply (NASDAQ:MWIV), Pfizer products accounted for 23% of sales, Fort Dodge 12%, Merial 60% and Intervet 9%.

On the flip side, however, it's clear that pet (and livestock) drugs have become an important part of the new diversified business models of big pharma. Pfizer plans to give the group "more autonomy" and global moves imply additional investment as well. Pfizer Animal Health does business in 60 countries and in the first quarter of 2009 opened a new Shanghai office, expressed interest in acquiring an Indian veterinary health company, and announced new product launches in certain countries.

Long term consumer spending forecasts on veterinary services, prescription and over-the-counter drugs are quite positive. We estimate veterinary services spending to grow 4% in 2009 and 8% in 2010, reaching $16.4 billion by 2011, compared to $13.6 billion in 2007. Compelling demographics will drive future growth. In 2003, the $8 billion spent on vet services was split 50/50 by pet owners making less than $70,000 per year and those making more than $70,000 per year. But by 2007 almost $14 billion was spent, and that ratio changed to 28/72, favoring higher income consumers. Married couples without children are the biggest spenders at the vet, according to the Bureau of Labor Statistics, spending over $4.5 billion in 2007 alone.