Healthcare for animals pays

INVESTING: LESS GENERIC COMPETITION

The large-cap pharmaceuticals sector has performed strongly over the last five years, rising 38% since 2014. While its performance doesn’t eclipse that of the S&P 500 or the Dow Jones Industrial index (both on an upward trajectory since 2009), the sector demonstrates long-term growth potential as people grow older and wealthier and require more healthcare.

However, there are a few red flags in this rosy backdrop. Governments use their clout to force healthcare pricing lower, thereby impacting profitability.

Generic companies are more prevalent and efficient than ever before, and sales of older blockbuster drugs inevitably slow.

Lower risk

But these risks disappear in animal drugs.

Organic growth potential in the sector exceeds that of human healthcare. There are two reasons for this, says Stonehage Fleming head of equity management Gerrit Smit. Firstly, human protein consumption is growing in excess of the world population, especially in emerging markets. Livestock and fish farming, and the treatment of those animals, benefit directly.

Secondly, the role pets play in human life is changing. The same demographics that make healthcare attractive – ageing populations, rising middle classes and delaying having a family – support animal healthcare. “As wealth improves one sees a ‘humanisation’ of pets,” Smit says. For instance in the US, pets are part of the family, and as such one doesn’t ask the vet what a certain drug or procedure costs.

Less pressure on margins

Animal healthcare has other advantages over human healthcare, says Smit.

First, there tends to be more brand loyalty and less generic competition than in human drugs. The legal risks are much lower compared to human healthcare.