‘Humanizaton’of pets adds tailwind to investment in related stocks

Companion animals were a welcome distraction from Covid-19 lockdowns, leading to a surge in pet adoptions and related spending on veterinary services.

Evidence of how much the pandemic changed things shows up in overall spending on companion animals in the US, the largest global pet market. Between 2020 and 2022 spending rose 26 per cent to US $136.8 billion, according to the American Pet Products Association (APPA). The APPA projects a 4 per cent bump this year to US $143.6 billion with pet food and treats and veterinary and related services accounting for almost two-thirds of the total.

That means a continuing opportunity for investors, analysts say, in a sector that offers steady growth and an expanding array of services.  Seven out of 10 U.S. households have pets which is a higher proportion than those that have children. Millennials are now the single largest pet-owning group and view their companion animals as family. That means a willingness to pay for top quality food and accessories, frequent checkups and diagnostic tests as needed. Rising incomes in the developing world are adding more power to the overall trend.   

“The pandemic drove growth in animal health stocks and that growth really hasn’t gone away,” says Paul MacDonald, chief investment officer of Oakville, Ont.-based Harvest ETFs.

“Although the rate of change of things like vet visits has slowed from the pandemic peak, we’re still well above 2019 levels and that longer term companion animal thesis is still very, very much intact.”

Harvest holds two pet pharma companies in its Harvest Healthcare Leaders Income ETF (TSX:HHL). One is Zoetis Inc. (NYSE:ZTS) the largest pure animal pharma company, which was spun off by Pfizer Inc. in 2013.  Zoetis is having a good year with its shares up 16 per cent year to date.

The other is Merck & Co. (NYSE:MRK) which operates its animal health business as a division within the larger company.  It generates about 10 per cent of Merck’s overall revenue. Merck’s shares are up 2 per cent year-to-date.

Simeon Hyman, global strategist for ProShares ETFs based in Bethesda, MD., agrees with the thesis that the pet industry has a number energizers. ProShares markets the only pure play pet ETF (NYSEarca: PAWZ) which holds Zoetis and Merck.

Another large holdings is Elanco Animal Health Inc. (NYSE:ELAN) which was spun off from Eli Lilly & Co. in 2019.  It is the second-largest pet pharma company after Zoetis, but has performed poorly since the spin off. Its shares are down 26 per cent year-to-date and 63 per cent in the last 12 months. Elanco has had problems with key products and has lowered its earnings estimates for the year.

 Mr. Hyman is optimistic.

“Any pet economy statistic you look at shows pretty impressive growth,whether it’s in dollars or in participation,” Mr. Hyman says. He points to a recent report by Bloomberg Intelligence  which noted that the global pet economy will  grow to just under US $500 billion by 2030, which is 54 per cent higher than today.  Morgan Stanley likewise noted that there are 5 million more pets in the U.S. than  pre-pandemic.

 Mr. McDonald says the companion animal industry is unique in part because the animals “are taking a higher status within the family.” This translates into higher spending to keep the pets healthy.

The lockdowns helped change attitudes towards companion animals because people spent more time with their pets and became more aware of their needs. This “humanization of pets” as Mr. Hyman calls it has led to more regular checkups, diagnostic tests and better quality food and treats.

The APPA expects that US $37 billion of  spending this year, or 26 per cent of the total, will go into veterinary care, which includes an ever increasing array of services. One beneficiary of this trends has been Idexx Labs Inc. (NDQ:IDXX) another top holding in the PAWZ ETF.  Idexx markets a range of diagnostic tests for companion animals and livestock. Its shares are up 18 per cent year-to-date and 39 per cent in the last 52 weeks.  To May 11

Analysts are watching how a slowing economy will affect the sector. As interest rates have risen rise and household incomes have become squeezed, the question is how much discretionary spending families will direct towards their companion animals.

 Mr. McDonald expects some movement away from higher end food to cheaper products. Families might also make fewer wellness check ups or opt for fewer diagnostic tests.

“The question is what component of pet spending is truly discretionary?  In the short term, the diagnostic side is probably more cyclical than then the drugs and treatment side,” Mr. McDonald says.

He expects the pharmaceutical side to be strong because it offers what he calls superior a good.

“If I know a particular drug for fleas and ticks is better, I’m going to give it to my dog.  I will find it way to make that happen.”

So what are the innovations to watch? Mr. MacDonald says new drugs, which are relatively fast to get to market and such things as monoclonal antibodies, pain medications and osteoarthritis treatments for older animals.

For investors, the question is how to capture the industry’s potential. Not surprisingly, both analysts believe a diversified basket is the best way because it offers a balanced approach to the sector.

“It’s all about diversification,” Mr. Hyman says.

This article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on May 31, 2023. For reprint information please view this page