Better Buy: Pfizer Inc. (PFE) or Zoetis Inc (ZTS)?

Pfizer Inc. (NYSE:PFE) recently spun off animal health firm Zoetis Inc (NYSE:ZTS) in the form of an IPO. Should you take a spin in the animal kingdom or stick with treating humans? Let’s take a look a closer look at their business models.

Research & development
Zoetis’ model relies on leveraging existing animal health products by adding new species or claims to existing drugs. It’s also focused on gaining approvals in new markets and on creating new combinations and reformulations. In other words, there’s not a lot of innovation going on.

While it’s done its fair share of me-too drugs, Pfizer’s human drug development is more innovative. That comes at a higher cost, but should pay off down the line with higher-priced drugs.

Payers
Animal health is generally a cash payer market. The animal’s owners pay distributors directly for the drugs. Pfizer, on the other hand, has to deal with insurers trying to negotiate lower prices and jump through hoops to get its drugs covered.

Zoetis clearly has the advantage here, especially as health-care reform highlights drug pricing as a contentious issue.

Competition
Zoetis is the largest provider of animal health products, but it does have competition from Merck & Co., Inc. (NYSE:MRK)‘s animal health business, Sanofi SA (ADR) (NYSE:SNY)‘s Merial, Bayer, Boehringer Ingelheim, and Eli Lilly & Co.(NYSE:LLY). Interestingly, the companies seem to have found their own niches which has cut down on competition at the product level, allowing everyone to survive.

The lack of competition in individual products means antitrust issues come into play if companies try to join forces to top Zoetis like Merck & Co., Inc.(NYSE:MRK) and Sanofi did a few years ago. Some human diseases have substantial competition, but the markets are so much larger that even a small piece of a market can produce sales of hundreds of million dollars. Both Zoetis and Pfizer are big players in their respective fields and aren’t going to get pushed around.

Patents
Like human medicines, drugs for animals are covered by patents. Unlike humans, though, when patents expire, it isn’t as big of a deal for a couple of reasons.

First, there’s no Lipitor of the animal drug world. Zoetis sells hundreds of products. In 2011, its top-selling product line, the ceftiofur line, contributed less than 8% of revenue. Losing patent protection on one drug isn’t crucial. Second, because of the smaller market size, there’s less incentive for generics to enter the market when a medication goes off patent. Finally, brand loyalty can keep customers around even after the drug does go off patent. There’s no pharmacist following insurer’s instructions to automatically switch patients to a generic.