What growth lies ahead?
According to Zoetis’ S1 filing, the animal-health industry represents a $100 billion-per-year market opportunity that is expected to grow at a CAGR of 6% between 2011 and 2016. Zoetis has capitalized on worldwide growth by expanding sales 53% from the $2.8 billion it garnered in 2009.
There are several important advantages for the industry that will enable steady growth for years to come. The S1 filing states that R&D is faster and less expensive than its human-health counterpart, sales are more evenly spread across a company’s entire portfolio (lack of blockbusters is a good thing), and brand loyalty reigns supreme.
Alternatives for slowing pharma
Spinoffs don’t make sense for every company. For instance, management at Merck recently dismissed the idea of breaking up its animal-health division, opting instead to keep the growth under one big umbrella. The company’s recently released 2012 results contained just three sentences on its animal-health segment. Was this done intentionally to deflect attention?
Keep in mind: Zoetis’ IPO didn’t magically solve Pfizer’s problems overnight. and it’s still too early to gauge the market’s appetite for such a company. Should the companies I’ve mentioned resist the temptation of a spinoff, what other options exist to appease shareholders?
An increased focus on pipeline biologics, which face less generic competition and can target a broad range of indications, is occurring throughout the industry. Sanofi, with an impressive lineup and pipeline from subsidiary Genzyme, may be the best positioned of this group. The company’s latest batch of biologics (“New Genzyme”) grew 16.9% in 2012.
Small molecules still have a place in Big Pharma’s heart, however. Lantus propelled Sanofi’s diabetes segment to nearly $6 billion in sales last year, while Merck’s Januvia/Janumet line pulled in another $5.75 billion. Eli Lilly boasted eight blockbuster drugs last year that included depression drug Cymbalta, which accounted for 22% of total revenue for the company.
And of course, acquisitions are always on the radar for Big Pharma companies, although I’ll label any possibilities as speculation and leave it at that.
Foolish bottom line
The decision for a spinoff comes down to a management team’s preference for growth: Capture it internally or let it ride on the open market. In the long term, I think it will be tough for pharmaceutical companies to resist the possibilities of rolling out their animal-health divisions. A wildly successful Zoetis will only make the itch worse and turn up the volume from shareholders worried about stalling growth engines.
The article Should Big Pharma Follow the Spinoff Trend? originally appeared on Fool.com and is written by Maxx Chatsko.
Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio or follow him on Twitter, @BlacknGoldFool, to keep up with his writing on energy, bioprocessing, and emerging technologies.The Motley Fool has no position in any of the stocks mentioned.
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