Hi, some of you have already drawn some attention to the stock of $ZTS (+1,11%) .
Profile:
$ZTS (+1,11%) is a global animal health company. In 2013, it was $PFE (+0,2%) and has been independent ever since.
The company’s focus is entirely on the animal health sector—this is where it generates its revenue through the development, manufacture, and distribution of pharmaceuticals, diagnostics, vaccines, and genetic tests.
Strictly speaking, the Animal Health division is divided into the companion animal segment—such as dogs, cats, etc.—and the livestock segment—such as cattle, sheep, and similar animals.
Zoetis generates about 70% of its revenue from the companion animal market.
This is important because, unlike the livestock market, the pet market exhibits higher growth momentum due to the humanization of pets —Private individuals are more willing to buy medications here when their pet is unwell than a farmer who has more than 2,500 head of cattle and is struggling with regulations, meat prices, and so on.
Risk: But there is also a high risk here—due to the humanization of pets, a company and its products can lose customer trust more quickly and permanently if they do not help or, worse yet, lead to complications. And this is exactly what is alleged to have happened with Zoetis’s medications!
Zoetis has faced strong criticism for failing to provide sufficient warnings about the side effects of Librela and Solensia. These side effects reportedly led, in some cases, to severe side effects in the animals. Furthermore, shareholders have filed lawsuits because management communicated the loss of market share too late and not thoroughly enough. In addition, the world’s leading regulatory agencies (the FDA and EMA) have tightened their oversight—anyone familiar with the pharmaceutical sector knows that this signals trouble.
The consequences are clearly felt—veterinarians are prescribing the affected medications much more cautiously, which is hindering growth and benefiting competitors such as $ELAN (-0,58%) , $MRK (+0,65%) and Boehringer Ingelheim.
Compounding these problems is persistent inflation, which means that consumers can no longer afford—or are unwilling to pay for—expensive premium drugs and are turning to cheaper generics.
Opportunity/Risk:
Zoetis remains an absolute heavyweight in the animal health industry and the undisputed number one.
In the past, the company has not only outperformed the MSCI World but has even outperformed the Nasdaq at times.
In a long-term comparison, however, the stock price is currently even below the growth rate of the Euro Stoxx 50. This is also reflected in the P/E ratio—where a value of 30–35 used to be the norm for years, it now stands at 12, making it an absolute outlier. At the same time, Zoetis’s other business operations are actually very robust. Zoetis’s payout ratio currently stands at about 33%, which means the company still has more than enough cash available for research, dividend increases, and potential reserves for lost lawsuits.
One factor, however, weighs heavily—the loss of customer trust!
This is one of the most critical issues in the pharmaceutical sector that can become a long-term problem.
Consider, for instance, the stories surrounding Purdue Pharma (the OxyContin scandal), Mallinckrodt & Endo International, $BAYN (+2,47%) (the glyphosate/Monsanto acquisition or the Lipobay scandal), $MRK (+0,65%) (the Vioxx scandal), and worst of all: Thomae with its product Contergan.
Although these examples come from human medicine, I would like to remind you once again of the humanization of pets and the share of Zoetis’s revenue that this market represents.
Conclusion:
A current investment in Zoetis is weighed down by many potential future problems, but could also pay off due to the enormous discount if $ZTS (+1,11%) it can ward off the lawsuits and manage to regain the trust of shareholders and, above all, customers. A turnaround bet, so to speak.
Note:
I am not personally invested in this stock and do not intend to be—but that’s more because I’m currently quite satisfied with how my portfolio looks than for any of the reasons mentioned above.
Yours, FinanzMechanik
