Biotech Values

[DewDiligence]

Notable items from ZTS webcast by Mark Schoenebaum of ISI:

• Independent industry consultants agree with the ZTS roadshow materials that the global animal-heath market is growing at 5-7% annually; ZTS has roughly a 20% share of the global market.

• ZTS manufactures most of its products in-house, but it has a sweet deal for zero-markup manufacturing of certain products by PFE for the next two years.

• ZTS has considerable upside leverage on the SG&A line insofar as the worldwide infrastructure is already established. (I.e. adding new products won’t bump up SG&A proportionally.)

• ZTS also has upside leverage on the income-tax line. The pro forma tax rate used in the roadshow was 35%, which is unduly high insofar as 61% of ZTS’ sales are ex-us. (The 35% rate was probably used because PFE repatriated a large portion of ZTS’ foreign profits in order to fund PFE’s dividend and share buybacks.)

• Emerging markets comprised 27% of sales in 2011; this proportion is expected to increase due to TGDT.

• Generic competition is a non-issue because there is no Hatch-Waxman-like framework for animal drugs and there is no involvement by third-party payers.

• The non-GAAP EPS forecast for 2013 is $1.70. The leverage items mentioned above—as well as share buybacks—can easily support a 10%+ growth rate in EPS based on a 5-7% growth in revenue.

ISI is not an underwriter in the ZTS IPO, so its analysis is presumably objective; however, it’s reasonable to presume that ISI will initiate coverage of ZTS during the next month or two.