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Morningstar | We Find Much to Like About Zoetis’ Wide Moat and the Animal Health Market

Zoetis is the clear leader in the global animal health industry, and we believe it possesses the widest moat of all the players. While the industry as a whole possesses many characteristics that are conducive to moats, Zoetis' global infrastructure gives it a cost advantage over its peers. The firm also fends off competition through the impressive breadth of its product portfolio, which includes a number of drugs for specific canine and feline ailments.The animal health industry has been largely ignored because these businesses are often buried within larger human health companies, but it has many attractive characteristics, including cash-pay buyers, a fragmented customer base, and minimal generic competition. Due to the fragmented and cash-pay customer base, animal drugmakers hold significant pricing power. On the human health side, firms are traditionally at the mercy of payers. Government payers or large managed-care firms with pharmacy benefit managers have more power to force generic utilization, squash price increases, and even in extreme cases force price cuts onto drug manufacturers. However, animal health products are purchased by a fragmented group of protein producers, veterinarians, and pet owners, allowing very little bargaining power over the highly concentrated animal health firms. This industry also benefits from favorable growth tailwinds that should allow Zoetis to increase revenue at a mid-single-digit long-term growth rate. On the production animal side, rising standards of living in emerging markets should lead to wider adoption of meat-heavy diets, driving greater demand for livestock products. On the companion side, Zoetis benefits from pet owners’ increasingly strong relationships with pets as members of the family, which drastically increases their willingness to pay for expensive treatments. Zoetis is likely to grow at a rate relatively close to the industry, but it should be able to maintain above-average margins due to its scale. Especially in emerging markets, Zoetis’ scale allows it to use its own salesforce, while smaller competitors are often forced to rely on more expensive distributors.