By, 20 April 2017.
So far, 2017 has said farewell to Merial and seen the purchase of Nexvet Biopharma – two very different companies in the animal health space. Animal Pharm editor Joseph Harvey takes a closer look at these two transactions and their short-term legacy. Is it the best of times or the worst of times for animal health?
In the year Charles Dickens died – 1870 – Marcel Mérieux was born and the shoots that would become Merial first began to grow.
The French animal health company enjoyed a dynastic and prolonged past as an innovator. Now, the firm’s brand has been taken off the market and replaced by its new owner Boehringer Ingelheim.
Merial’s story – steeped in history – is indicative of today’s animal health majors. Boehringer itself formed its animal health division in the 1950s.
However, this type of animal health player is becoming more scarce. Brands such as Pfizer, Novartis, Lohmann, Fort Dodge, Rhône-Poulenc, Schering-Plough and Alpharma – plus many more – have all been merged into other businesses over the last two decades.
In its wake are standalone veterinary therapeutic specialists such as Nexvet Biopharma, which is soon to be like Merial and amalgamated into another animal health firm.
Nexvet is more indicative of a newer breed of companies. While Aratana Therapeutics’ licensing deal with Elanco is characteristic of the modern animal health industry, the $85 million acquisition of Nexvet is also a sign that times are changing.
These two firms have validated their business models – Nexvet has reached an exit and Aratana has reeled in significant licencing fees – something other start-ups will take note of and aim to replicate.
Nexvet’s acquisition may even wake larger companies up to the possibility of purchasing Aratana, which is likely to command a higher fee as it already has commercialized products.
John Kreger, financial analysts at William Blair, noted: “The Nexvet deal adds to our belief that Aratana is an attractive partnering or purchase target for a larger animal health company, given its three product approvals last year and what we view as a reasonable asset value. Note that only one of Aratana’s approved products has been partnered – Galliprant with Eli Lilly’s Elanco.
“We suspect that Aratana would command a higher valuation than Nexvet, considering it already has three approved products, two of which are already on the market and a third that should be by year-end. Nexvet’s lead product is expected to reach the US market two years later in 2019.
Mr Kreger suggested valuing these early-stage animal health companies is difficult due to their lack of sales. However, he estimated Aratana’s value at a multiple close to three times, “which would put the total company value close to $500m or $11-$12 per share”. Aratana’s current market capitalization is around $200m.
Growing attention in the investment stakes
This type of research note is just one example of animal health becoming a more open and scrutinized industry. The fees included for the Aratana/Elanco and Nexvet/Zoetis transactions were disclosed due to the biotech firms being publicly listed. This gives interesting insight into the valuation of these companies, something the often-used ‘undisclosed fee’ never did.
Investment banks and financial analysts are passing judgement on these deals – bringing animal health to the attention of an unprecedented amount of potential shareholders.
Even the private animal health businesses are becoming more vocal. At last month’s Boehringer Ingelheim annual press conference, the company dedicated a whole session to animal health – something the German drugmaker has never done before – due to the growing size of its veterinary medicines division.
New acquisition targets
Nexvet represents the first small biotechnology company to be acquired in animal health. The firm has yet to make its first revenues and is still in the process of product development – the deal acts as an endorsement of Nexvet’s monoclonal antibody platform by Zoetis.
However, Nexvet is not the only smaller-scale company Zoetis has acquired recently. Last year, the industry leader’s sole purchase was of Scandinavian Micro Biodevices for a similar fee – $80m.
Could the Boehringer-Merial deal mark the end of big corporate mergers in animal health? The top 10 now only features four animal health companies connected to wider human-focused businesses. Five years ago this number was seven.
The remainder of the firms in the top 10 – Ceva Santé Animale, Virbac, Vetoquinol – represent very independent businesses and not potential acquisition targets for the leaders.
Zoetis’ acquisitions have been smart and nimble. These smaller deals allow companies to swiftly add to their existing repertoire of products – something Ceva, Merck, Vetoquinol and Dechra Pharmaceuticals have done this year and last.
This style of bolt-on M&A lends itself to more opportunistic and targeted deals. To quote Dickens again, this time from David Copperfield, “procrastination is the thief of time”.
With this in mind, as well as the rising amount of standalone animal health companies, the industry’s leaders will need to more like quick and nimble start-ups when considering future M&A targets.