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  1. Home
  2. / Investing
  3. / U.S. Equity

Consider Drug Stocks for Animals

Bill Ackman is betting on Zoetis -- and you should, too.
By SHAM GAD Nov 12, 2014 | 03:00 PM EST
Stocks quotes in this article: KIN, ZTS, PFE, PAHC

Bill Ackman announced yesterday that he and another hedge fund had taken a 10% stake in animal pharmaceutical company Zoetis (ZTS). As expected, the shares surged by nearly 10%. Zoetis is $4 billion animal drug company that was spun off by Pfizer (PFE).

I believe the animal healthcare market will be a very attractive industry over the long run. The vast majority of healthcare spending and attention is on human drugs while animal healthcare gets little attention despite strong growth. It's likely Ackman's investment will now shine move the spotlight a little closer to this industry.

For several months now, I have been discussing the merits of animal drug companies, notably small-cap name Kindred Biosciences (KIN). With animal drugs, the biggest risks found in human drug development are basically eliminated. Many companies that specialize in human drug development are one-trick ponies -- they have one major drug that will either make or break them. That's because taking a drug from conception to FDA approval takes many years and an enormous amount of capital.

That's not the case with animal drugs. The development lifecycle stage is usually a few years and the costs are relatively small. An example is the recent unsuccessful outcome of one of Kindred's key drugs. The total cost was less than $5 million and the tests took less than three-year's time. Kindred has a market cap of less than $200 million. It currently has no debt and more than $100 million in cash -- along with a dozen or so potential candidates. In addition, going from one phase to next in the approval process is a significantly less rigorous process than the requirements for human drugs.

Another player in the space is Phibro Animal Health (PAHC), which is a $1 billion drug company that reported earnings that beat estimates on Tuesday. This company is now likely to get attention with Ackman's move into Zoetis. Phibro  develops, manufactures, and markets animal health and mineral nutrition products for use in the production of poultry, swine, cattle and dairy.

Whether it is for agricultural purposes or pet care, the drug industry for animals is an under-tapped market today. I have held this view for quite some time now and I think the market will eventually catch on.

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At the time of publication, Gad was long KIN.

TAGS: Investing | U.S. Equity

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