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Scarce market-leading assets and strong operational execution have increased animal health valuations

BofA Merrill Lynch's Justine Conway believes a scarcity of sizable market-leading assets, coupled with an increase in public market valuations, has led to a notable increase in multiples for the animal health industry. 

Speaking at the recent Animal Health Investment Europe conference in London, Ms Conway said: "Looking at the deals in animal health from 2005 to 2013, that was at a time before Zoetis was public and although there were other public animal health companies, the Zoetis IPO really heightened investor interest in the space. 

"Animal health is great sector with the strong underlying growth drivers in both the livestock and companion segments. Before 2013, US investors didn't have much opportunity to put capital to work given a lack of public pure-play assets. Zoetis represented a sizeable pure-play opportunity that captured investor interest and, as they have delivered on that coveted growth story, investor sentiment has continued to grow and improve.

"When Zoetis IPOed as the leading global animal health company, it was valued at a ~13x enterprise value/EBITDA multiple ($26 per share). Now it is trading at a ~20x enterprise value/EBITDA multiple and has reached almost $100 per share. For reference, Elanco IPOed at ~16x enterprise value/EBITDA five years later.

"I believe another thing that has generated premium multiples is a scarcity of sizeable, market leading assets. Pharmaq was a market leader and it was the only sizeable way for Zoetis to get into the aquaculture business. Antelliq was another market leading business."

The Merck acquisition of Antelliq represented the acquisition of a leader in digital animal identification, traceability and monitoring solutions. Zoetis has also been active in the digital technology sector through its deal for Smartbow last year.

However, even after numerous acquisitions in this space, there are still many remaining options for potential acquisitions in the animal health monitoring and data technology arena.

Ms Conway – director of BofA Merrill Lynch's global healthcare group – also highlighted a number of emerging themes in animal health M&A.

"A lot of the larger companies are starting to look more towards external innovation in the way human healthcare companies did, for example the Zoetis collaboration with Regeneron and the Bayer collaboration with Mitsui," she stated.

"They are starting to do this in more interesting ways through partnerships, minority investments, product licensing and even through their own venture capital funds. Merck for example has established Merck Animal Health Ventures and Tyson has established Tyson Ventures with a focus on sustainability and the Internet of Food. There are also other external funds being raised for example CAH Capital.

"We're also seeing companies move out of their core therapeutics businesses and they are starting to invest a lot more in adjacencies. For example, Zoetis/Abaxis, Merck/Antelliq, Vetoquinol/Farmvet Systems. That's the broader theme we're seeing in animal health and I think we're going to continue seeing acquisitions of innovative companies or investment in them." 

McKinsey and Paine Schwartz point-of-view

Ms Conway was part of a panel of M&A experts hosted by Ajay Dhankhar – a senior partner at McKinsey, who highlighted the positive impact recent major deals have had in animal health.

Mr Dhankhar noted: "In 10 years, the industry has completely transformed. Investment has been great and M&A has been tremendous. The McKinsey analysis actually shows M&A has actually created value. There is still debate on whether M&A has created value in biopharma – it's made companies bigger. In animal health there is evidence to show that not only has M&A made companies bigger but it has actually created shareholder value through synergies and innovation.

"Animal heath reminds me a lot of medtech back in the 1990s, where there was such a strong track record of finding companies with $20-30m revenues and then a larger player would come in and buy them and put an extra zero against their revenues."

Spencer Swayze – managing director at US private equity business Paine Schwartz Partners – said his firm has seen a lot of early-stage opportunities in animal health that will become viable for potential deals.

He told conference delegates: "With our investment mandate they are not accessible because they are pre-revenue but we think those companies will start to drive revenue and we will be able to invest."

Mr Swayze said Paine Schwartz is focused on areas with "a productivity imperative", as well as disease detection, prevention and nutritional health.

"Data and diagnostics are very interesting settings too," he stated. "We are seeing a lot of innovation in that area. As a private equity firm, we are not buying product risks – we're buying execution risks. What we're really looking for is something that can truly show a value-capture mechanism and is proven already with a paying customer. Data and diagnostics marry in nicely with other preventatives. So, we also look at vaccines."

California-based Paine Schwartz's most recent deal in the animal health sector was in MS Biotech – a company that specializes in natural performance products for the beef feedlot and dairy cattle markets. The private equity firm's $893 million Paine Schwartz Food Chain Fund IV is dedicated to food and agribusiness investing. 

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