Initial public offerings (IPOs) are all the rage in the animal health industry because they are new, sexy, and unknown, much like a beautiful stranger you might meet at a cafe in Paris. And just as with the stranger in Paris, the infatuation investors have for animal health could lead to happiness or it could lead to disaster. It may sound trite, but before committing to a long term stay in Paris with your new flame or jumping into an animal health investment, do your homework and due diligence. Unfortunately, it appears that some investors do not know enough about the industry to understand the data they see. This is understandable given the history of the animal health industry.
In 2012, there were no publically traded animal health pharmaceutical companies in the US. Animal health companies were either privately owned or were de minimis divisions of large human health pharmaceutical companies. This meant that there was little meaningful financial data available to the investment community.
Then, in January 2013 Pfizer spun off its animal health division and created Zoetis through an IPO. The perceived success of the Zoetis IPO started a wave of IPOs in the animal health space. Aratana Therapeutics issued a $40 million IPO in June 2013. Kindred Biosciences followed with a $40 million IPO in December 2013. Phibro recently announced an IPO scheduled for 2014. There are several others in the planning stages and some estimate as many as 12 animal health related IPOs could occur in the next three years.
Fifteen months after the Zoetis IPO, Zoetis remains the single significant source of publically available financial data for the entire animal health pharmaceutical industry. Yet, we are on the verge of an avalanche of animal health IPOs. Is this surge of investment in animal health a good thing for investors or the animal health industry? I do not know, but knowledge of the industry is the key to success.
A major issue in animal health investment is lack of animal health knowledge in the investment community. Because the industry was so insular for so long, there is a lack of meaningful data to study and few trained analysts to study it as compared to human health. Investors simply don’t know what they don’t know when it comes to animal health investments.
Even more concerning is the tendency of some investors to view an animal health opportunity through a human health lens. Familiarity with human health can lead to overconfidence and poor decisions in animal health because assumptions that often underlie human health investment do not apply to animal health.
For example, unlike in human health, one cannot presume that the majority of sick animals receive treatment. Euthanasia remains a pet owner’s or protein producer’s treatment of choice for several diseases. Similarly, insurance is not yet a material factor in animal health therefore cost of treatment is critical.
There is also a huge difference between urban and rural animal health. In a veterinary school referral clinic setting I treated several dogs for cancer using chemotherapy. In three years of rural private practice I never treated a dog with chemotherapy.
Human health investors I advise often fail to appreciate the regulatory dynamics of animal health. The path to drug approval for animals is not necessarily smoother than the path for humans, particularly for food animal drugs.
Factors such as these can lead to a large discrepancy between the potential and actual market value of a particular animal health technology. Those unfamiliar with the nuances of animal health may fail to identify the factors that determine the success or failure of their investment.
Although long term animal health people are excited about the recent and long overdue interest in animal health, a lack of industry knowledge combined with a rush for investment may be a dangerous combination. For the sake of the industry, investors need to take the time to educate themselves before deciding where to invest in animal health. More specifically, investors need to leave their desks and their spreadsheets and learn what happens on the clinic floor or in the feedlot or in the slaughter house. Investors that take the time to get dirty will do well. Investors that stay clean will not.