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It looks as if there’s no end to the pharmaceutical industry’s merger-and-acquisition mania. The animal spirits have now spread to, well, animals. Or more specifically, animal health.
Valeant Pharmaceuticals International (NYSE: VRX) has made a preliminary approach to acquire Zoetis (NYSE: ZTS), which was spun off from Pfizer (NYSE: PFE) in 2013 and is the largest seller of vaccines and medicines for household pets and livestock.
Animal health would be a whole new field for Valeant. But it is believed that it was urged to make an offer by activist investor Bill Ackman. He owns an 8% stake in Zoetis and a 5.7% stake in Valeant.
Valeant is, of course, the very acquisitive Canadian pharmaceutical company that has made a name in the industry by very aggressive cost-cutting at the firms it acquires.
Animal Health Equals Healthy Profits
The animal-health business is certainly a good business to be in.
Animal medicines globally are currently a $23 billion market. And it continues to grow as the world’s middle class expands and more households have domestic pets.
Here in the U.S., veterinary spending on pets has risen roughly 6% annually over the past seven years. Zoetis says spending on livestock health is growing at about the same rate. All this spending translated into Zoetis generating $4.8 billion in revenues in 2014.
This sector is so attractive that Eli Lilly (NYSE: LLY) earlier this year paid $5.4 billion for the animal-health business of Novartis AG (NYSE: NVS). This deal made Lilly’s Elanco division the No. 2 player in the industry, behind only Zoetis.
The sector’s attractiveness makes it almost certain that more deals are in the works. But from what direction will the action come?
Bayer Wants to Expand Its Animal Kingdom
Besides Valeant, it is likely that Germany’s Bayer AG (OTC: BAYRY) is on the prowl. The company’s CEO, Marijn Dekkers, has in the past indicated interest in moving up from the No. 5 position in animal health.
Bayer was beaten to the punch for Novartis’ business by Lilly. It also made an unsuccessful bid years ago for the animal-health business of Schering-Plough, which is now a part of Merck (NYSE: MRK). It even held talks with Pfizer about Zoetis before it was spun off.
But no deal has been done … yet. As Dekkers said in May, “It hasn’t happened with us yet.”
The one thing holding Bayer back, as well as Valeant possibly, is debt. After the $14 billion acquisition of Merck’s over-the-counter drug business, Bayer has nearly $25 billion in debt and $13.5 in pension liabilities. That’s small potatoes to Valeant’s nearly $26 billion in long-term debt versus only $6.6 billion in shareholder equity.
But debt hasn’t stopped the mania yet. So what companies may be in play besides Zoetis?
Other Takeover Candidates
One company that immediately comes to mind is the clinical-stage pet-health company Aratana Therapeutics (NASDAQ: PETX). It’s been hot lately on the back of its announcement that its experimental appetite stimulant, capromorelin, met its goal in a late-stage trial. The drug may be launched in 2016, which is good news, as it would move Aratana toward becoming a viable commercial operation.
Another developmental pet therapies company is Kindred Biosciences (NASDAQ: KIN), which has a history of beating Wall Street earnings estimates. Earlier this year, Kindred reported positive results in a field study for its treatment for fever in horses. The study was the equivalent of Phase 2 trial.
There is also the possibility of Zoetis making a deal to avoid a takeover. It already has a poison pill defense, which it adopted in November.
Zoetis may look at buying IDEXX Laboratories (NASDAQ: IDXX), according to analyst Mark Massaro at Canaccord Genuity. Zoetis is extremely interested in adding scale to its animal-health diagnostics business, and IDEXX is a prominent firm in that sector.
The bottom line is that the pharma M&A dance in the animal-health sector has just begun. And everyone is looking for a dance partner.
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