The initial public offering of Zoetis ($ZTS), the animal health unit that was spun off from pharmaceutical giant Pfizer ($PFE) last February, was one of the most applauded Wall Street debuts of 2013. By the end of the year, Zoetis’s shares were trading at $31.60—a nearly 25% premium over their offering price and a major vote of confidence in the company’s strategy of developing drugs for pets and livestock. But when the Florham Park, NJ-based company announced lower-than-expected sales-growth projections for 2014 on Feb. 11, investors balked, sending the stock down more than 5% on three times its normal trading volume.

Zoetis’s stumble, most industry watchers agree, was not a mistake on the part of the company so much as a reflection of investors’ sky-high expectations for the rapidly growing animal health industry. In a word, animal health is hot. With pet ownership on the rise, and farming activity growing rapidly, particularly in developing countries, investors are clearly expecting continued strong demand for drugs to keep our dogs and cats healthy and our food supply safe. That confidence has benefited a range of companies, from multinational pharma leaders to tiny startups that are all angling for position in the animal health market.

Juan Ramón Alaix, CEO of Zoetis, is confident worldwide trends will support strong growth of his business, despite short-term financial pressures, including unfavorable exchange rates that he says could dampen revenues by as much as $100 million this year. Zoetis reported profits of $709 million on $4.6 billion in sales in 2013, and it expects sales of $4.65 billion to $4.75 billion this year. “The negative impact of the exchange rate probably was not fully captured by some of the projections that were made,” Alaix says. “We are targeting over a 5-year period to grow [revenues] in line or faster than the market. We are also targeting to grow earnings faster than revenues.”

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THE FUTURE OF ANIMAL HEALTH

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The market for animal medicines and vaccines—estimated at $22 billion a year—is projected to grow at a compound annual growth rate of 5.7% per year through 2016, according to veterinary consulting firm Vetnosis. Today, 62% of sales come from pharmaceuticals, 26% from biologics such as vaccines, and the rest from food additives, Vetnosis estimates.

Much of growth going forward will emanate from the world’s collective love of its dogs and cats. According to the American Pet Products Association (APPA), total spending by pet owners in the U.S. alone hit $55.5 billion in 2013—up from $45.5 billion just 5 years ago. Spending on veterinary care, including checkups and purchases of prescription drugs, hit $14.2 billion, which marked an increase of about 4% over the previous year.

Bob Vetere, CEO of APPA, predicts spending on pet health will grow as dogs and cats take an increasingly important role in family life. Even through the protracted recession, he says, devoted pet owners have continued to spend on sophisticated medical care. “What we’ve seen over the past 5 or 6 years is people cutting back on their own vacations, cutting back on going out to dinner, so they could make sure that Sparky and Fluffy were always taken care of,” Vetere says. “Now that we’re starting to come out of [the recession], it’s just mushrooming. I think you’re going to see the trend continue for the foreseeable future, and pet health will be one of the driving forces.”

Those favorable trends in animal health have sparked a frenzy among

investors. After Zoetis successfully raised $2.2 billion in its IPO, two animal health startups followed its lead. Kansas City, KS-based Aratana Therapeutics ($PETX) raised $40 million in its July 2013 IPO, and San Francisco-based Kindred Biosciences ($KIN) raised $56 million in December. Aratana raised an additional $98 million in a secondary offering this January.

Merger and acquisition activity in the animal health sector has also been on the rise. Aratana has made two acquisitions since last fall, picking up San Diego-based Vet Therapeutics in October and Belgium’s Okapi Sciences in January. Meanwhile, Wall Street has been abuzz with rumors of possible M&A deals being cooked up by Big Pharma players. In December, rumors emerged that Novartis ($NVS) was courting potential suitors for its veterinary-products business—a unit that brings in $1.1 billion in sales per year. There was even speculation that Merck ($MRK) was considering divesting its animal health unit or trading its consumer health business for Novartis’s animal health unit. Novartis declined to comment, while Merck did not respond to an interview request.

ADDRESSING THE SPECTRUM OF ANIMAL DISEASESWhen word emerged that Novartis might be selling its animal health unit, one of the rumored suitors was German drug giant Bayer, which itself brings in about $1.7 billion a year in veterinary sales. A spokesperson for Bayer declined to comment on those rumors but was happy to discuss the company’s 2013 purchase of Teva

Pharmaceutical Industries’ ($TEVA) line of animal health products.

In the $145 million deal, Bayer picked up a range of products for both pets and livestock, as well as a manufacturing plant in St. Joseph, MO. The acquisition “allowed us to broaden our range of animal care solutions for companion animals—complementing our current parasiticide and anti-infective offerings with dermatology, nutraceutical, and pet wellness products,” said the Bayer spokesperson in an e-mail.

As consumer spending on animal medicines rises, so does the investment drugmakers are willing to make in research

and development. Animal health companies poured a total of $747 million into R&D in 2012—a 4.6% jump over the previous year, according to the Animal Health Institute.

Makers of animal drugs have grown increasingly confident in the willingness of pet owners to buy specialized treatments. When

Zoetis was still under Pfizer’s umbrella, it released drugs such as Cerenia to treat motion sickness in dogs and Palladia, which is used to treat dogs with a type of skin cancer called mast cell tumors.

Most recently, in January, Zoetis launched Apoquel, a pill to treat itchy dogs whose constant scratching is caused by allergies. Apoquel is the

first veterinary product to target an enzyme called Janus kinase (JAK), although there are JAK inhibitors on the market for people with certain autoimmune disorders.

Alaix says drugs to treat allergies represent an unmet need in veterinary medicine and therefore are an attractive target for Zoetis. “Itchy dogs have mostly been treated with corticosteroids, but the problem is side effects,” Alaix says. “Now we can offer to pet owners a product with a high level of efficacy that also has a very good safety profile. We’ve had a positive response from our customers in the U.S., the U.K., and Germany.”

Big players and startups alike are bringing biotech innovation to animal health. Aratana recently received approval from the U.S. Department of Agriculture to market a monoclonal antibody to treat T-cell lymphoma in dogs. (The company also developed a canine B-cell lymphoma treatment, which it licensed to Novartis in 2012 for commercialization in the U.S. and Canada.)

The T-cell lymphoma drug, known as AT-005, is essentially a dog version of Campath, a drug developed for people that targeted CD52, a protein that has been implicated in some types of lymphoma. The USDA granted Aratana a “conditional” approval, which allows the company to market it to veterinarians while simultaneously completing the clinical trials required for a full approval.

The involvement of the USDA in approving veterinary medicines is one of the factors that makes animal

“We are targeting over a 5-year period to grow [revenues] in line or faster than the market. We are also targeting to grow earnings faster than revenues.”

JUAN RAMÓN ALAIX, CEO, ZOETIS

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health an attractive proposition, says Steven St. Peter, CEO of Aratana. The USDA splits approval authority with the FDA: The former approves all large-molecule drugs, such as biologics and vaccines, while the FDA handles small molecules. Thanks to a law passed in the early 1900s—when massive outbreaks of diseases affecting livestock demanded rapid approvals of new drugs and vaccines—companies like Aratana can speed new biologics to market much faster than human-health companies can.

“The USDA approaches this in a way that allows you to come to them with a proof-of-concept study in a small number of laboratory animals,” St. Peter says. “Then you go out and treat a couple dozen cats or dogs, and if you bring that data back and show it to them they can give you a conditional license,” provided the drug is addressing a true unmet need in the market, he says. Aratana continues to run clinical trials on AT-005 and hopes to win full approval in 2016.

Aratana has more than 15 small and large molecules in its pipeline to treat diseases such as osteoarthritis, postoperative pain, and immune disorders. The company’s strategy is to acquire product candidates that have already been proven to be safe and effective—not just in animals, but also in people. “We really want to understand the biology and science,” St. Peter says. “Ideally we want a molecular target that has been very well validated from the human experience.”

Rival Kindred Biosciences is

pursuing a similar strategy, but CEO Richard Chin believes there’s plenty of room in the market for all its players. “We see the pet space as where human biotech was 35 years ago,” Chin says. “We see a lot of unmet medical needs, we see it’s growing very rapidly, and we see very few entrants into [the market] so far.”

Kindred’s pipeline includes 10 large and small molecules to treat not just a range of diseases, but a range of pets, as well. Among the indications the company

is pursuing are gastrointestinal disease in cats, cancer in dogs, and postoperative pain in horses. The company hopes to file three of its lead drug candidates for regulatory approval this year.

LOW INVESTMENT, HIGH RETURNPart of what makes animal health a viable pursuit, Chin says, is that the cost of drug development is much lower than it is on the human side. That’s because the clinical trials required for approval only need to involve hundreds of patients, not thousands. And when the initial

“What we’ve seen over the past 5 or 6 years is people cutting back on their own vacations, cutting back on going out to dinner, so they could make sure that Sparky and Fluffy were always taken care of.”

BOB VETERE, CEO, APPA

when asked about administering medication to pets, pet owners say they are willing to pay more for products that ease administration. Clearly there is value in creating therapies which boost animal acceptance and caregiver compliance.

It is no surprise then that nearly 80% of the approved veterinary solid oral dose forms on the market are “chewable,” with the majority being simple hard tablets with flavoring added prior to compression. Animal acceptance continues to be a challenge, causing veterinarians to seek out compounding pharmacies to reformulate drugs into soft chews, suspensions, transdermals, and other untested and unapproved

formats. New formulation technologies are clearly needed in animal health.

One such technology is Orally Disintegrating Tablets (ODT). ODT has been used in human pharma in a variety of therapeutic spaces such as pediatrics, geriatrics, and mental health – all of which pose challenges of acceptance, compliance, and adherence. ODT formulations differ, however, so critical factors such as dissolving speed must be considered since animals will not hold doses in their mouth. Softgel is another dose form which provides many distinct formulation advantages, but is clearly a last resort for animal health due to concerns that animals will chew and rupture the capsules before ingestion. Technology and formulation expertise allows for reformulation for animal health products and will open new doors to more molecules for animal health. These and other drug delivery technologies can almost certainly improve the lives of animals as well as those that care for them.

Catalent has a focus on the Animal Health Industry. For more information on any of these challenges or technologies, visit www.catalent.com/animalhealth, email solutions@catalent.com, or call +1 888 SOLUTION. l

A well-known fact in veterinary medicine: animals won’t willingly consume medication, even in life or death situations. This clearly creates therapeutic challenges for veterinarians, and is further complicated by the involvement of a caregiver (pet owner or livestock producer), who has to administer the medication to the often unwilling animal.

Non-compliance is a multi-factorial problem which continues to plague veterinary medicine. It accounts for nearly 14% of treatment failures for infections when oral antimicrobials are prescribed. Of the estimated 176 million prescriptions for pet medications written by veterinarians annually, pet owners fail to administer 39 million doses. The challenges of the caregiver struggling with unwilling animals combined with the stress on the animal of being forced to consume something causes the whole experience to be unpleasant, and can result in diminished therapeutic outcomes.

How do pet owners in particular overcome these challenges today? There are many tricks involving food products, and even purpose produced treats, but none of these take into account the food effect of certain drugs. These tricks have their own cost, however, so

Overcoming the Therapeutic Challenge in Animal Health

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Non-compliance is a multi-factorial problem which continues to plague veterinary medicine. It accounts for nearly 14% of treatment failures for infections when oral antimicrobials are prescribed.

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work to develop and validate the drug candidate has already been done, upfront costs can be low. “We don’t require $500 million or more to develop a drug,” Chin says. “We’re talking about maybe $3 million to $5 million to develop a pet drug. So we don’t have to raise nearly as much capital and we can move much faster.”

The end market is often smaller in veterinary medicine than it is in human medicine, but Chin says when you look at the overall economic picture, animal health is still a valuable proposition. Chin

quotes surveys showing that 35% of pet owners are willing to pay $2,000 or more to treat their four-legged friends. About 25% of owners will pay $5,000 or more. “We don’t need everyone,” Chin says, adding that all you need to score a blockbuster in animal health is $100 million or more in annual sales—not $1 billion. “You have to knock a zero off the market size, but you can knock two zeros off the cost of development. So the return is very good.”

For Kindred’s startup team, the lure of animal health seemed

obvious, but they didn’t know what investors would think. So prior to their IPO they took advantage of a provision in the federal Jumpstart Our Business Startups (JOBS) Act that allows companies to file for their IPOs in stealth mode and then get feedback from potential investors in so-called test-the-waters meetings. “The veterinary space had become a very hot area for investors, so when we did the test-the-water meetings we were able to detect very high interest in our company,” Chin says. Kindred’s share price has risen from $8.75 to $20 since its December IPO.

One risk animal health companies face is that they will always be vulnerable to broad economic trends and the stark reality of pet ownership: A penny-pinching owner of a 12-year-old dog with cancer may choose euthanasia over an expensive pharmaceutical treatment. The APPA’s Vetere says long-term demographic trends might also put pressure on animal health companies, because the baby boomers that have been driving the demand for veterinary products can’t prop up the market forever. “I think what everybody has to start paying attention to is at some point baby boomers are going to get old and reach a point where they won’t own pets at the same level,” Vetere says. “Their kids are not necessarily turning to pets with the same intensity, so where will the backfill be?”

Aratana’s St. Peter points out that the market risk in animal health is cushioned somewhat by the lack of third-party payers. Most pet owners do not carry insurance, so they’re paying out-of-pocket for pet

“The USDA approaches this in a way that allows you to come to them with a proof-of-concept study in a small number of laboratory animals.”

STEVEN ST. PETER, CEO, ARATANA

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drugs, and therefore they’re able to make their own decisions about the cost-effectiveness of their choices. At the same time, insurers are not in the picture demanding that patients switch to inexpensive generics, so there’s little incentive for generic drugmakers to invade the market. That gives pet owners more of an opportunity to become attached to brands.

“The brands are a lot stickier in the animal health market because it is a consumer market, and brands tend to be really important to consumers,” St. Peter says. “Without the third-party payers there can be more brand loyalty.”

That’s not to say there won’t be competition in animal health. Already there are signs that the industry’s big players are pursuing some of the same targets. For

example, Zoetis’s Alaix points out that there’s a race underway to develop a pill that can prevent fleas, ticks, and other parasites in pets. (The most commonly used products today are topical, including Zoetis’s Revolution.) “Parasiticides are the largest franchise in the animal health industry,” Alaix says. “We are under-represented in this area. Some of our competitors are launching oral formulations, and we are highly interested in developing our own compound to

compete successfully in this area.”

KEEPING FOOD HERDS HEALTHYCows and pigs may not be as cuddly as cats and dogs, but they, too, are vital to the growth of the animal health industry. Zoetis and Bayer are prominent players in livestock and poultry, as are Big Pharma companies such as Eli Lilly ($LLY) and Merck.

At Zoetis, sales of farming products account for 64% of total revenues,

most of which comes from developed markets, Alaix says. But he sees big opportunities overseas, particularly in rapidly developing countries such as China and Brazil. “The main driver of the livestock segment is that the population is growing but also the middle class in emerging markets is growing,” Alaix says. “These two elements are significantly increasing the consumption of animal proteins. But the challenge is limited resources around the world. There is less land and limited access to water, so there is a high need to increase productivity in livestock.” That’s why Zoetis expects continued strength in its farm animal division in the next 5 years, with the fastest growth rate being charted in emerging markets.

Zoetis has been positioning itself to take advantage of the global demand for farming products. The company has more than 13 manufacturing plants in 11 countries, which allows it to quickly manufacture vaccines to address local outbreaks. Some of those plants also have their own R&D staff, so the company can turn on a dime to address diseases as they emerge. Zoetis is currently selling its products in more than 120 countries, and much of its salesforce consists of veterinarians.

In complex markets such as China, Zoetis has found value in allying with local players. In 2011, Zoetis (then part of Pfizer) formed a joint venture with Jilin Guoyuan Animal Health in Huinan to develop animal vaccines. “We saw the opportunity to develop specific products in China for the needs of their producers. We also saw that producing in China would reduce our cost of goods,” Alaix says.

Furthermore, Huinan was building a new manufacturing plant, so the partnership gave Zoetis “the opportunity to participate in the late stages of construction and make sure all the processes and standards were in line with the high quality seen in developed markets,” Alaix says. Last August the two companies received approval in China to market a vaccine to prevent a disease affecting swine there.

The current consensus among Wall Street analysts is that Zoetis will bring in $4.74 billion in sales this year and $5 billion in 2015. Analysts expect earnings per share to grow from $1.55 this year to $1.75 next year. Investors seem to be buying into the company’s

long-term potential: Zoetis’s share price has started to recover, from a low of $28.77 after the company announced its muted expectations for 2014 on Feb. 11 to a recent price of nearly $31.

As for the continued M&A speculation, the short-term currency pressures, and all the other distractions on Wall Street, Alaix says he remains focused on the potential for continued demand for products to keep the world’s population of four-legged, feathered, and furry species healthy. “The fundamentals of animal health remain the same,” Alaix says. “We are convinced there will be predictable and steady growth in this industry.” l

“We see the pet space as where human biotech was 35 years ago. We see a lot of unmet medical needs, we see it’s growing very rapidly, and we see very few entrants into [the market] so far.”

RICHARD CHIN, CEO, KINDRED BIOSCIENCES

“The fundamentals of animal health remain the same. We are convinced there will be predictable and steady growth in this industry.”

JUAN RAMÓN ALAIX, CEO, ZOETIS