Call of the Wild: Animal-Health Stocks Will Continue to Shine – Wall Street Journal

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Elanco Animal Health President and CEO Jeff Simmons rings the ceremonial bell as the stock begins trading on the floor at the NYSE on Sept. 20.


Photo:

brendan mcdermid/Reuters

Animal-health spinoffs are hot again on Wall Street. There is still plenty of meat on the bone for investors.

Elanco Animal Health
,


ELAN -5.28%

formerly a unit of

Eli Lilly
,


LLY 0.25%

priced its initial public offering Wednesday evening at $24 a share, above the expected range. Shares rocketed 50% on Thursday.

That enthusiasm is well-founded. Animal health is a stable, growing business, both for livestock and pets. Given how the industry works, that shouldn’t change any time soon.

For starters, animal medicines are generally a cash-pay market. That is far simpler than the labyrinthine U.S. human-health system. As a result, the products drug companies sell must stand on price and quality while the price-eroding generic drug industry for animal health isn’t nearly as large as it is for humans. Meanwhile, companies spend less on research and development as a share of sales than human-focused drug companies so clinical trial stumbles aren’t as costly. All that means these stocks deserve relatively high multiples.

Elanco’s public predecessor has built an enviable track record. Shares of competitor

Zoetis
,

formerly a unit of

Pfizer
,

have nearly tripled since its 2013 IPO and now fetch 27 times forward earnings estimates. Wall Street consensus forecasts call for Zoetis to generate 7% to 8% sales growth annually over the next few years.

Other opportunities for investors are coming soon. Medical-supply company

Henry Schein

is planning to spin off its animal unit and merge it with Vets First Choice before the end of this year. The combined company, to be called Vets First Corp., will trade on public markets.

Yet another pharma heavyweight could join the party. While

Merck

& Co said in July that its animal health business is a “key pillar” of its growth strategy, the strong performance of peers could eventually make it reconsider. That business certainly would fetch plenty of investor interest. Merck’s unit booked $1.1 billion in second-quarter sales and the company says it is growing faster than the industry average.

Even if Merck stands pat, Elanco’s strong debut suggests animal health will continue to be an investor’s best friend.

Write to Charley Grant at charles.grant@wsj.com