Animal drugs, diagnostics and distribution on display at J.P. Morgan confab

"We're not going to talk about humans today," warned Jonathan Ayers, CEO of IDEXX Laboratories ($IDXX), at the start of his presentation at the J.P. Morgan Healthcare Conference on Jan. 13. It was an apt intro, as most of the companies presenting at the closely watched annual gathering in San Francisco operate in the realm of human health. IDEXX does offer some diagnostic products used in human healthcare, but most of its revenues come from the rapidly growing animal health industry, so Ayers focused his entire presentation on that segment of the market, livening up his financial estimates with colorful slides featuring playful dogs and cats.

The presence of animal health companies continues to grow at J.P. Morgan's gathering of healthcare leaders. In addition to IDEXX, this year's confab featured presentations by its diagnostics rival Abaxis ($ABAX), as well as by distributor Henry Schein ($HSIC) and leading animal drugmaker Zoetis ($ZTS).

Ayers estimated that the market for animal diagnostics is growing 9% a year in the U.S. and 2.5% faster than overall pet care spending, making it "a tremendous growth annuity." But he was careful to point out that IDEXX is continuing to invest in innovation, referencing a slide showing that the company's investment in research and development is 6 times that of Abaxis. He pointed to IDEXX's next-generation chemistry analyzer, Catalyst, as a direct beneficiary of that investment: The company placed nearly 5,000 Catalyst instruments in veterinary offices in 2015, up from about 3,000 in 2014, he said.

For Schein CEO Stanley Bergman, the J.P. Morgan event was an opportunity to explain the prospects for the distribution side of animal health, as well as for supporting services the company offers, such as software that veterinarians use to manage their practices. Schein's practice-management system is now used by half of the veterinary clinics in the U.S., he told investors at the conference. Bergman predicted that the market for veterinary services would continue to grow because of an increase in pet ownership by the middle class and the elderly, "two demographics that work in our favor," he said.

Bergman also pointed to some of Schein's most recent acquisitions, which are helping accelerate the company's expansion in animal health. At the start of the conference, Schein announced it would acquire RxWorks, a distributor of veterinary practice management software in Australia, New Zealand and other countries. The company did not disclose the value of the deal, except to say that RxWorks had sales of $7 million in the year ended June 2015. Schein recently completed an 80% investment in Vetstreet, a provider of marketing software and health analytics to veterinarians and producers of animal products, and last summer it acquired Jorgen Kruuse, a Scandinavian provider of veterinary services and supplies, which will expand the company's footprint in 23 countries.

As for Zoetis, it made its J.P. Morgan appearance one day after announcing it might have to take a $45 million charge against earnings, due to a decision by the European Commission that special tax incentives awarded to the company in Belgium are not legal. CEO Juan Ramón Alaix told audience members at the conference that he was disappointed and that the company is "working on a plan to mitigate the impact."

He then steered the presentation toward the growth opportunities that Zoetis is pursuing, as well as the progress it is making to complete a massive cost-cutting initiative launched last year. Alaix said that the company's target goal of saving $300 million a year in costs is "progressing ahead of our expectations." In fact, during the conference, the company disclosed to the SEC that it had divested its 55% ownership share of a Taiwanese manufacturing plan to Yung Shin Pharmaceutical Industrial Co., which is based in Taiwan. It was part of Zoetis' plan to exit or close 10 manufacturing sites.

And Zoetis' hit product Apoquel for treating allergic dermatitis in dogs is no longer constrained by a supply shortfall that hampered its launch, Alaix said during the J.P. Morgan presentation.

During a Q&A after the presentation, analysts peppered Alaix and Chief Financial Officer Paul Herendeen with questions about some of Zoetis' most recent strategic moves. One asked them to explain the recent $765 million acquisition of Pharmaq, a maker of fish vaccines, for example. Herendeen pointed out that Pharmaq is growing 17% a year and it "has a pipeline that's very well developed and that will help fuel that growth," he said. Herendeen added that Zoetis wouldn't hesitate to do more Pharmaq-like deals should they present themselves.

- listen to Zoetis' J.P. Morgan presentation and Q&A via webcast
- here's the SEC filing on Zoetis' Taiwanese manufacturing plant
- access Schein's J.P. Morgan presentation here
- here's the press release on Schein's acquisition of RxWorks
- here's the webcast of IDEXX's talk