Zoetis shareholders applaud $765M Pharmaq buy and strong earnings

Zoetis CEO Juan Ramón Alaix

Shares of Zoetis ($ZTS) were up more than 5% by midday Tuesday to $46.45, after the company topped an acquisition announcement by posting better-than-expected earnings. On Monday night, Zoetis said it would purchase Norway-based Pharmaq, a maker of vaccines for farmed fish, for $765 million. The next morning, the company announced that even though revenues were flat in the third quarter, its net income jumped 14% year over year to $189 million, or 38 cents per share.

Excluding the impact of special items, Zoetis earned 50 cents per share--handily beating the average analyst estimate of 40 cents, according to the Wall Street Journal. And the company upped its forecasts for the full year, telling analysts to expect EPS of $1.70 to $1.74, rather than the previously forecast $1.63 to $1.68. Zoetis also projected that the company's sales would grow 3% to 5% next year and 4% to 9% in 2017, and that profit margins would continue to improve.

Zoetis is counting on the new aquaculture business to drive some of that long-term growth. The company had been courting Pharmaq for several years and jumped at the opportunity to acquire it when its private equity owners stepped up to express interest in a deal, said Juan Ramón Alaix, CEO of Zoetis in an interview with FierceAnimalHealth following the earnings announcement. "We think aquatic health is definitely an area of growing opportunity," he said. "Farmed fish represent 50% of the total consumption of fish, and we expect consumption of fish will grow faster than any other protein."

Pharmaq adds a suite of aquaculture products to Zoetis's livestock business, including AlphaMax for preventing sea lice in farmed salmon and a variety of diagnostic products for the early detection of infectious diseases. The company estimates that the market for aquatic health products is $400 million a year and is growing as much as 8% annually--slightly outpacing the growth of the production- and companion-animal markets.

What attracted Zoetis to Pharmaq was not just the products on the market, but also its pipeline, Alaix said. "Pharmaq has a very impressive level of innovation," he said. Zoetis predicts the Pharmaq acquisition will close next week and become accretive to adjusted earnings after 2016.

The acquisition probably wasn't entirely surprising to Zoetis watchers. Over the summer, a Canaccord Genuity analyst published a report surmising that Zoetis might buy veterinary diagnostics maker IDEXX ($IDXX). Of course, Zoetis itself had become a target of takeover speculation, after activist investor William Ackman of Pershing Square Capital bought up a large stake of the company and reportedly started pressuring executives to put it on the block. Zoetis appointed Pershing Square's William Doyle to the board, further fueling rumors that the company's future as an independent entity might be in danger. It was after that speculation died down that analysts started talking about what company Zoetis might buy instead.

Meanwhile, the company has been rolling out an extensive cost-cutting plan that includes eliminating 5,000 SKUs, exiting 10 manufacturing plants and cutting 165 jobs from its New Jersey headquarters. During the third quarter, the company brought down its cost of sales by 3% and its marketing and administrative spending by 5%.

Alaix said Zoetis's reconstituted board has been "very supportive" of the changes it has been making. "The board understands animal health and is helping me and the rest of the team increase the value to shareholders," he said.

As for Zoetis's ability to stay independent, Alaix says he isn't worried. "The quarter was great, but even more important in my opinion is the confidence we are showing by projecting revenues and income in '16 and '17 in the face of the impact of exchange rates," he said.

- here's the acquisition announcement
- access Zoetis's earnings report here
- read more at the Wall Street Journal (sub. req.)