With vet drugs pumping, it's no wonder that pharma's eyeing M&A

What's with all the M&A rumors floating around in the animal health world? Just look at Zoetis' ($ZTS) Apoquel and it's clear why Big Pharma names are keen to bolster their positions in the space.

Apoquel, a treatment for dogs with itchy skin, launched last year and became so popular with pet owners that Zoetis couldn't keep up with demand, the Financial Times reports. Since then, the company has ramped up supplies, and it now expects sales to at least quadruple this year to $150 million.

Increased medication of pets in the developed world is just one factor drawing M&A interest from the likes of Bayer and Valeant ($VRX). Pet ownership is ramping up in the developing world, too, and--more importantly--growing wealth in emerging markets such as China is leading to diets richer in protein, driving a shift to industrial farming and upping demand for farm animal vaccines.

Throw in the ability to sell directly to vets, pet owners and farmers--skipping price negotiations with governments and insurer--plus lower drug-development costs and greater longevity with less competition, and it's easy to see why interest in animal health is heating up. All told, research and consulting firm Vetnosis expects animal health sales to vault to $33 billion by 2020, up from $24 billion last year, the FT notes.

With that in mind, analysts expect to see more consolidation in the space. Eli Lilly ($LLY) has already bulked up, adding Novartis' ($NVS) animal health unit to lock up the No. 2 position in the field behind Zoetis, spun off from Pfizer ($PFE). Valeant has said it's interested in making an entry, and last week it reportedly approached Zoetis about a tie-up. And Bayer and Merck ($MRK) have expressed interest in bolstering their businesses, too.

One deal that won't be happening any time soon, execs say: The Zoetis-to-Bayer scenario that industry-watchers expected the German pharma to pursue, after it drums up extra funds by shedding its plastics division. As Bayer management recently told Bernstein analyst Ronny Gal, the company weighed that transaction last year but ultimately decided to pick up Merck's OTC unit instead. That deal, in addition to other buyout moves, would right now make an acquisition the likes of $25 billion Zoetis "challenging."

Special Reports: Top 10 animal health companies of 2013 | Pharma's top 10 M&A deals of 2014 - Eli Lilly/Novartis Animal Health

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