Biggest IPO Since Facebook Tests Pfizer’s Pigs and Dogs Strategy
Pfizer (PFE) Inc. is taking its animal- health unit public in the biggest U.S. initial offering since Facebook Inc., a bet that growing affluence means more spending on caring for livestock and pets.
Pfizer’s Zoetis Inc. is seeking to sell 86.1 million shares today for $22 to $25 each, giving the unit a market value of about $11.8 billion at the midpoint of the range, regulatory filings show. The IPO, which may raise as much as $2.2 billion, would make Zoetis the largest public company of its kind -- and one of the only focused solely on medicines for animals, competing with businesses owned by such drugmakers as Sanofi and Merck & Co.
The IPO is well-timed -- coming as stocks hit 5-year highs -- and represents another step by Pfizer Chief Executive Officer Ian Read to slim down and focus on developing new prescription drugs. Both Novartis AG and Bayer AG explored a purchase of Zoetis last year, according to people familiar, reflecting the attractiveness of the animal-health industry.
“Globally, people are feeling wealthier, which tends to mean more demand for meat for human consumption,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “They’re also more likely to have pets and more likely to take better care of their pets.”
Pfizer, the world’s largest drug company with $61.2 billion in sales, is offering 17 percent of Zoetis in the IPO, the biggest in the U.S. since Facebook raised $16 billion last year. Shares will start trading tomorrow on the New York Stock Exchange under the symbol ZTS. The IPO is being led by JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley.
Zoetis, based in Madison, New Jersey, traces its roots back to 1952 as a Pfizer unit and has made at least 10 acquisitions to become the largest animal-health business, with $4.3 billion sales in 2012 -- about 20 percent of the $22 billion market.
It competes mainly with non-listed units of companies such as Merck, Sanofi and Eli Lilly & Co., according to Mark Schoenebaum, a New York-based analyst at ISI Group Inc.
While Zoetis’s 17 percent sales growth in 2011 outpaced all but Lilly’s animal unit, data compiled by Bloomberg show, Pfizer is parting with the company as part of Read’s strategy to concentrate on the drug business after losing patent protection for cholesterol pill Lipitor, the world’s best-selling medicine.
Pfizer sold its infant-nutrition business for $11.9 billion to Nestle SA last year. The drugmaker will likely use proceeds from divestitures for share buybacks, Read has said.
In August, Read announced plans for the IPO, replicating a successful strategy adopted by fellow drugmaker Bristol-Myers Squibb Co. It completed a similar spinoff in 2009 of baby- formula maker Mead Johnson Nutrition Co. The stock has almost tripled since the offering.
“Zoetis is nowhere near a huge business for them, it’s something they could easily part with, and there’s no massive synergy,” said Pete Sorrentino, who helps oversee $14.7 billion including Pfizer stock at Huntington Asset Advisors in Cincinnati.
At the same time, Zoetis is benefiting from people consuming more protein, a trend likely to increase as wealth grows in emerging countries such as Brazil, China and India, said Marshall Gordon, of New York-based money manager ClearBridge Investments LLC. As meat consumption grows, so will spending on animal medicine for cows, pigs and poultry, he said.
The company projects the global market will grow 6 percent annually through 2016. Emerging markets contributed 27 percent of Zoetis’s revenue in 2011.
“This is a play on global income growth -- as people rise in income, they eat more protein, and they have more companion animals,” Gordon said.
For investors, “the price is very reasonable,” ISI’s Schoenebaum said in a phone interview, assuming Zoetis maintains its historical pace of sales growth excluding acquisitions. The company increased that measure by 5 percent in the nine months through September, filings show. The operating profit margin during the period was about 18 percent, data compiled by Bloomberg show.
Zoetis’s valuation appears in line or cheaper than the few pure-play animal-health companies that trade publicly. Virbac SA (VIRP), a Carros, France-based animal-medicine maker that had $881 million of sales in the 12 months through June, trades at 22 times net income, data compiled by Bloomberg show. Dechra Pharmaceuticals Plc (DPH), a Staffordshire, England-based maker of pet medications, trades in London at 46 times net income in the year through June, data compiled by Bloomberg show.
If Zoetis’s IPO goes well, other drugmakers like Merck and Sanofi could decide to put their animal units up for sale, said Judson Clark, an analyst with Edward Jones & Co. “It’s not unreasonable at all to think of this as the canary in the coal mine,” he said.
Zoetis itself could be a takeover target in a few years, Huntington’s Sorrentino said. For now, as investors find equities appealing again, the timing of the IPO looks good, he said. The S&P 500 Index (SPX) had risen 5.7 percent this month through Jan. 29, the best start of a year since 1989.
“There’s definitely money on the sidelines that, for the right name, would come into play,” he said.