WSJournal. Zoetis Jumps 20% in Debut
A growing global appetite for protein has beefed up what was once a sliver of Pfizer Inc. PFE +1.28% into a new company worth more than $15 billion.
Shares of Pfizer's animal-health unit, Zoetis Inc., ZTS +19.27% which makes drugs and vaccines given to livestock, gained 19% in their trading debut Friday following an initial public offering that raised $2.2 billion. Its medicines are also used for pets.
An expanding middle class world-wide is fueling higher demand for meat and animal protein, as well as spending on health-care for pets, said Zoetis Chief Executive Juan Ramon Alaix. At the same time, land and water resources are limited, which puts a premium on products that can help increase productivity of animal protein, he said in an interview Friday.
Zoetis, Madison, N.J., holds the leading share in an estimated $22 billion global market for animal medicines and vaccines, ranging from anti-infectives for cattle to drugs that prevent vomiting due to motion sickness in dogs. The market is expected to grow about 5.7% annually, on average, for the next five years, said Mr. Alaix, who had led the business since 2006.
"This industry shows steady and predictable growth," Mr. Alaix said, adding that Zoetis's global reach will allow it to capitalize on opportunities in emerging markets including Brazil and China.
New York-based Pfizer built its animal-health business to more than $4 billion in annual revenue through a combination of internal growth and acquisitions such as the 2009 acquisition of Wyeth, which had a big animal-health business. The company sells its products directly to livestock producers and veterinarians in 70 countries. Revenue from livestock products represents about two-thirds of total sales.
Zoetis competes with the animal-health divisions of other companies that primarily focus on human pharmaceuticals, including Merck & Co., Sanofi SA SAN.FR +0.33% and Eli Lilly LLY +0.95% & Co. Pfizer chose to split off Zoetis as part of a broader plan to shed certain assets and hone its focus on human pharmaceuticals. It is expected to use the deal's proceeds primarily for stock buybacks.
Other drug makers, though, have touted the benefits of keeping their animal-health divisions in-house. Merck and Lilly executives said this week that they had no plans to spin off their respective animal-health businesses because they contributed profits and were complementary to their human drug businesses.
Zoetis executives ring the opening bell on the floor of the New York Stock Exchange on Friday.
Mr. Alaix said there were distinctions between the animal-health and human-health businesses. Animal drugs are the result of a faster and less costly research-and-development process; meanwhile, customers of animal drugs primarily pay out-of-pocket, rather than through insurance.
Analysts said Zoetis makes an attractive investment in part because animal-drug research and development tends to be less cost-intensive than that of human medicine development. Animal health tends to rely on a broad array of smaller drugs rather than costly, blockbuster drugs that take can years to develop, according to Kevin Kedra, a health-care analyst at Gabelli & Co. in Rye, N.Y.
"The appeal of this stock is that animal health is a fairly stable market, as opposed to the up-and-down nature of human health, which is very much based on patents. This is a much more consistent, stable business," Mr. Kedra said.
There are some risks to sales growth in the animal-health market. Mr. Alaix said the recent drought in the central U.S. hurts demand because some livestock customers reduced herd size. Also, some countries have introduced restrictions and bans on the use of antibiotics in food-producing animals, and they have increased regulation of raising food-producing animals.
Mr. Alaix said these developments have had some impact on the animal-health market, but he still expected the overall market to grow.
Zoetis shares rose $5.01, on their first day of trading to close at $31.01 on the New York Stock Exchange, after being priced at a higher-than-expected $26 apiece late Thursday. Zoetis had a market value of about $15.5 billion based on Friday's close.
The IPO is the largest from a U.S. company since Facebook Inc.'s FB -4.04% $16 billion deal in May. It is also the largest so-called carve-out to list on a U.S. exchange since U.K. hedge-fund manager Man Group EMG.LN +2.32% PLC broke away from MF Global Ltd., MFGLQ +2.38% which was its brokerage arm, in a $2.9 billion deal in 2007, according to Dealogic.
Pfizer will retain a roughly 80% stake of Zoetis after the offering, but it may pursue a separation at a later date. Pfizer executives said last year the company might allow Pfizer shareholders to exchange shares for Zoetis. Current Pfizer shareholders must go into the open market to buy Zoetis shares.
A spokeswoman said Friday Pfizer has several alternatives for distributing the remaining shares. It will make that decision based on "what delivers the best after-tax return for our shareholders," the spokeswoman said.
Pfizer this week reported its animal-health unit revenue rose 3% to $4.3 billion for 2012, comprising 7.3% of Pfizer's total revenue.
J.P. Morgan Chase JPM +1.70% & Co, Bank of America Corp. BAC +3.45% and Morgan Stanley MS +3.11% served as Zoetis's lead underwriters.
