Which pet health companies are attracting buyout interest?

Households might be rethinking the cost of pet ownership, but the pet care industry is poised for growth. Pet health firms such as Heska and Dechra Pharmaceuticals are becoming buyout targets for private firms looking to capitalise on the opportunity.

- Pet health firm Heska has been targeted by Pedigree dog food maker Mars. 

- Consolidation is helping Dechra Pharmaceuticals to bolster its product pipeline.

- ProShares Pet Care ETF holds both companies and is up 7% over the past six months. 

Global lockdowns sparked an enthusiasm for four-legged companions. But there are signs that some are rethinking the cost of ownership, especially as inflation hits pet food prices. 

According to UK Pet Food’s Annual Pet Survey, released in March, there are 38 million pets in households up and down the country, up 8.6% from the previous year. Despite this, the proportion of households owning pets has slipped to 57% from 62% in 2022. 

The research also found that only 29% of people had thought about the cost of ownership prior to getting a pet, while ownership had proved to be more expensive than expected for 18% of respondents. 

Nevertheless, analysts at Morgan Stanley have forecast pet spending will increase through to the end of the decade. Products, including fresh and preservative-free meals and treats, are expected to see the highest amount of spending, with consumers set to splash an estimated $158bn by 2030, making it the biggest industry segment. Around $118bn is likely to be spent on pet services, which include grooming and trips to the vet. 

The pet care sector, specifically pet health, is well-positioned for growth, even if some consumers are cutting back in the near term. The Opto industry spotlight on the theme details how pet companies are faring in the current economic climate.

Private sector interest

Pet care’s growth potential has helped the sector to attract interest from private companies and equity firms. After a couple of years of slow dealmaking, mergers and acquisitions (M&A) activity is ramping up again, and players involved in the pet health space have become buyout targets. 

The maker of Pedigree dog food products, Mars Incorporated, is doubling down on its commitment to pet care with the $1.3bn acquisition of veterinary diagnostics firm Heska [HSKA]. The deal, announced in early April, “will mean broader coverage across diagnostic products, services, and technology, and will accelerate R&D for novel solutions”, said Mars president of petcare, science and diagnostics Nefertiti Greene in a statement. 

UK veterinary product maker Dechra Pharmaceuticals [DPH.L] was in talks with Swedish private equity outfit EQT, which has already invested in the UK’s leading pet insurer ManyPets and leading European online retailer Zooplus. 

However, Dechra has rejected the proposal, with investment management firm Newton, which owns 0.5% of Dechra, calling the £4.6bn offer “opportunistic”, and arguing that it doesn’t fairly reflect the company’s product pipeline, as was reported by the Times. 

Future value in product pipelines

Recent consolidation in the sector is helping pet health companies to look more attractive, which, in turn, could help give them more leverage when agreeing to a buyout deal. 

Last August, Dechra bought California veterinary pharmaceutical manufacturer Med-Pharmex for around $260m to scale up its US operations. It also acquired North Carolina-based Piedmont Animal Health, which focuses on chewy therapeutic treats, for $210m a month earlier. 

“The business significantly strengthens our pipeline of novel products, with the two near-term opportunities both expected to be top-ten products and expected to be approved in financial years 2024 and 2025,” Dechra stated in its second half of 2022 report, released in February. 

Piedmont currently has six candidates at early stages of development. If launched successfully, Dechra is hoping they could end up among its top 20 products.

More than a pandemic play

Even though consumers may be rethinking the cost of pet ownership in the near term, pet health remains a defensive business, because those that do have four-legged friends will always need to care for them. This is good news for the likes of Heska and Dechra. 

The veterinary services market is projected to grow at a CAGR of 6.7% from 2022 to 2030, by which time the market should be worth at least $160.9bn, according to Allianz data released earlier this year.

Pet health’s defensiveness makes “investment in the pet sector relatively low-risk”, noted Simeon Gutman, equity analyst at Morgan Stanley, in a report on the sector.

Innovation and lower costs

As pet health companies continue to innovate, the market is expected to expand further. For example, R&D will help to speed up vaccine development and lower development costs. 

In the future, pet health will likely shift from a focus on treating diseases to preventing pets from contracting them in the first place. The acceleration of artificial intelligence could lead to smart solutions that can detect early signs of health problems. This should result in faster clinical decision-making and lower the cost of managing the health of pets over their lifetimes. 

“Humanisation, premiumisation, health and wellness, sustainability and digitalisation are now the five key trends shaping the global pet care industry and these are set to drive demand in the future,” wrote Rahul Bhushan, co-founder of Rize ETF, in his March analysis of the rise of pet care M&A activity.

Funds in focus: Proshares Pet Care ETF

Due to the fact the surge in spending on pet care is relatively recent, there are just two ETFs offering direct exposure to the theme.

The Rize Pet Care UCITS ETF [PETZ.L] is weighted heavily in favour of pet health and food and consumer products. The sectors account for 43% and 30.2% of the portfolio exposure, respectively, as of 31 March. 

PETZ has allocated Dechra and Heska 3.82% and 3.00% of its portfolio, respectively, as of 24 April. The fund is down 16.3% in the past 52 weeks through 27 April, but up 3.3% in the past six months. 

The ProShares Pet Care ETF [PAWZ] is well-suited to investors looking for more specific exposure. As of 26 April, pharmaceuticals and biotechnology have a 36.84% weighting, while healthcare equipment and services have a 20.70% weighting, and consumer discretionary and food have weightings of 18.80% and 12.92%, respectively. 

Dechra is PAWZ’s top holding, with a weighting of 10.10%, while Heska has been allocated 2.54% of the portfolio as of 26 April. The fund is down 15.3% in the past 52 weeks, but up 7% in the past six months.