Will Pfizer spin-off leave cupboard bare?

IN THE orderly world of veterinary pharmaceuticals, change doesn’t come much bigger than Pfizer’s plan to spin-off its animal health division.

Pfizer’s is the world’s largest animal health business, with 2011 sales of $4.2 billion. It has more than 300 product lines used by livestock producers, pet owners and veterinarians in over 70 countries.

It is also the largest animal health business in both Australia and New Zealand, far exceeding its closest rivals, with sales boosted by the acquisitions of CSL and Fort Dodge.

Twenty percent of the business is to be floated, according to documents lodged with the US Securities and Exchange Commission, raising about $3.6 billion. Assuming it goes to plan, the rest of the business should follow for a total of $15 to $18 billion.

After the separation the animal health company (to be known as Zoetis) will have more than 9000 employees, of which 3500 will be in the US and 3,400 in sales.

The spin-off is part of Pfizer's plan to shed certain businesses in order to refocus on human pharmaceuticals, where it is suffering the impact of patent expiry on some major products. The company previously agreed to sell its nutrition unit to Nestlé for $11.85 billion in cash.

Being a stand-alone animal health business will be a new experience for both Zoetis and the industry generally. The next six largest animal health companies are MSD Animal Health (owned by Merck), Merial (owned by Sanofi), Elanco (owned by Lilly), Bayer, Boehringer-Ingelheim and Novartis. All have large pharmaceutical parents. You have to look lower down the list, at the much smaller diagnostic company Idexx and French-owned Virbac and Ceva, ranked eighth, ninth and tenth respectively, to find any that are exclusively focused on animals.

Whether the absence of such a parent turns out to be a net positive or negative for Zoetis and its customers will not be known for several years. But one thing can be predicted with certainty - progress will be watched closely, with others sure to follow if it succeeds. Pfizer’s issues are not unique.

There are some quite big differences between animal and human health that will influence how it turns out. Perhaps the main one is the fact that animal health is substantially less regulated than human health.

Although animal health products are subject to quite stringent regulatory approval, once approved they compete in a relatively free market. There is no Medicare or compulsory health insurance for animals, no PBS system governing product availability or price, and no taxpayer funded veterinary hospitals.

While insurance is available to cover veterinary expenses, it is voluntary and priced according to normal supply and demand rather than government directives. Indeed, most livestock and pet owners spend their own money with no expectation of having it refunded.

Because human pharmaceuticals are so highly regulated, human pharmaceutical companies tend to be quite bureaucratic with slow decision making and a risk averse culture. Every word and deed, down to the smallest leaflet and brand-labelled pen, is subject to scrutiny and there are armies of people employed to ensure the company complies with the myriad regulations.

Freed of this bureaucracy and its restrictive rules and policies at Pfizer, Zoetis has the potential to become far more flexible and entrepreneurial in its approach.

Animal health product development can also be more predictable due to the opportunities for line extensions, while product portfolios are more diverse because of differences between species and disease environments. These will help insulate Zoetis from the rollercoaster of drug development.

Moreover, the marketing of animal health products tends to be more direct than in human health. Whereas specialists, hospitals and GPs are inclined to insulate themselves from pharmaceutical companies amid hints of undue influence, there are no such concerns in the animal health world. Without losing their scepticism, livestock owners, veterinarians and pet owners rely heavily on the animal health companies for detailed information about their products.

That helps to build brand loyalty, enabling companies to retain customers more readily after the loss of patent-based and regulatory exclusivity. Again, this will benefit Zoetis once it is free from its pharmaceutical parent.

But there is a major risk in being a stand-alone business, and that is gaining access to innovative technology including new active ingredients. Discovering new chemicals is hugely expensive and highly risky, which is why quite a few animal products were first developed for human use.

When there is no pharmaceutical parent coming up with potential new products, the cupboard can sometimes become bare. A recent example of this was seen with Merial during the period when it was jointly owned by Sanofi and Merck. The company effectively became an orphan with neither parent keen to share new technology that would benefit the other, leading to a shortage of new products.

Zoetis will have no parent company generating new compounds that might become useful animal health products. It will have to utilise some of its new found freedom and flexibility to ensure its cupboards do not become bare.

Pfizer’s spin-off of its animal health business is quite a big deal in the animal health world with the potential to define the industry for a generation.

David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at reclaimfreedom@gmail.com

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20/08/2012 8:37:55 AM

Keep up the good work David. Enjoyed the read. Maybe the human health system could learn a thing or two from the low cost animal health system. Who cares with so much money at stake. Certainly not big pharma. Or maybe big pharma sees the writing on the wall for animal proteins given our likely inability to feed a world of pure grain eaters in the near future? Governments are already resourcing 'green' campaigners (eg ABC) in the name of animal welfare concerns but in reality it is just an acknowledgment we will struggle to feed a world full of meat eaters.
Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com


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