McKinsey: Big players need to evolve to continue on animal health's growth pathway
McKinsey is maintaining its optimism for the future of animal health and the momentum the sector is currently enjoying.
Franco Sturla – an associate partner at the firm – said while animal health is an industry McKinsey is "excited about", there is a constant need for the sector's companies to evolve.
At the recent Animal Health Investment Europe conference in London, Mr Sturla echoed the positive aspects of McKinsey's animal health predictions from last year. He said animal health has outperformed most stock market indices over the last five years, including the S&P 500. He noted animal health companies recorded a return to shareholders of about 42% in 2019, compared to 31% for the S&P 500.
"Last year, we said we thought the animal health industry had almost $80 billion worth of upside potential relating to value creation," Mr Sturla stated. "A year later, we can say quite confidently that potential very much remains. We are excited about animal health. This industry is dynamic but players need to respond to change and tweak their recipe for success."
McKinsey expects the animal health sector to increase in value by around $10bn over the next five years, with growth derived from both the livestock and companion animal segments. The infographic below details McKinsey's predictions for animal health market growth through to 2024.
Mr Sturla also said the EBITDA margin potential continues to improve for animal health businesses. Currently, this margin is around 32-34%.
However, McKinsey did highlight some barriers to industry growth and used the wider agricultural industry to indicate what might be ahead for animal health.
"As we look at the livestock industry more broadly, we have to be aware of what the agricultural industry has gone through in the last five or 10 years," Mr Sturla told delegates. "A lot of the circumstances that livestock is going through right now are quite similar to what agriculture has gone through in the last 10 years and what they are going through still."
McKinsey partner Chandrika Rajagopalan said for animal health to keep up its growth pace and capture the continued increase in margins, "a lot of disruption has to take place".
In the agricultural sector, there has been a blurring of lines for companies straddling several sub-segments. This is something that has been creeping into the animal health industry, with Zoetis expanding further into the diagnostics realm and Covetrus adding multiple services to the distribution sector.
Ms Rajagopalan said the landscape in the agricultural space has changed over the last decade. Firms previously specialized in seeds, crop protection, fertilizer or niche products. Companies are now working across all these sub-segments and witnessing market entry from huge multinationals from other spaces such as Microsoft and PepsiCo, as well as partnering with innovative agtech start-ups.
While animal health has seen a major influx of start-ups, it has yet to see many other major corporations moving into the veterinary medicine marketplace. This could be about to change with businesses such as Mars and Amazon becoming more interested in pet health, and digital technology becoming more widely accepted.
"Business models are being disrupted significantly," Ms Rajagopalan remarked. "Companies are starting to get more involved in services."
While product innovation continues, Ms Rajagopalan said businesses are starting to turn more to the idea of extracting more value from farmers and consumers by being service providers. The combination of new products, advisory services and analytics will be a key triumvirate for animal health in the future.
She suggested companies are still trying to work out how to monetize these ancillary services. At first, many agricultural firms attempted to charge farmers for the additional services they were being offered. However, Ms Rajagopalan claimed this is not yet a proven model in the ag space and offering extra services to customers could be done for free as a way of maintaining loyalty.
Mr Sturla said digitizing livestock management will be a key trend in the animal health sector in the coming five years. He underlined the need for connective products to provide optimization of datasets.