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30 Dec 2013 By Kevin Allison

Animal medicine, whether for livestock or pets, is a booming business. Pfizer’s recent spin-off, Zoetis, trades at a fat valuation premium to traditional drug makers. But the recent controversy over Zilmax, Merck’s feed additive, shows that an increasingly complicated global food chain carries its own investment risks.

Some of the excitement is understandable. Rising demand for meat in emerging markets is spurring sales of compounds that build muscle – like Zilmax – or fight infections on industrial farms. Animal health generally involves lower development costs, fewer regulations and less competition than human medicine.

This helps explain why Zoetis, spun out of Pfizer in January, trades on a market value of 20 times forecast 2014 earnings – a third higher than the average 15 times multiple for Big Pharma. Other drug companies, Merck included, are weighing up their own animal health carve-outs.

Yet the four-legged medical investment story can face trouble just like the human variety. Merck voluntarily suspended sales of Zilmax in the United States and Canada in the summer after Tyson Foods said a small number of cattle had showed up at some of its slaughterhouses having difficulty walking, although Tyson didn’t explicitly link the episode to Zilmax. A Reuters investigation has found that some of the ailing cattle were fed the drug and were missing hooves.

Merck is standing by Zilmax, and there’s still no proof it was to blame. But customers are twitchy. Cargill, the U.S. agriculture giant, has said it won’t allow Zilmax-fed beef into its supply chain until animal welfare concerns are resolved and its trading partners – including Asian buyers – start accepting it in their meat again.

For Merck, the financial damage is manageable. Zilmax’s roughly $160 million of annual revenue equates to about 5 percent of the company’s animal health sales, and well under 1 percent of the group’s overall top line.

For investors, though, the saga serves as a warning. Bad news travels fast in today’s global food system, partly thanks to stricter monitoring. That in turn has helped food safety keep pace with the industry’s growing complexity. But it also makes it a more dangerous place for investors than it may seem. With animal welfare and antibiotic resistance on watchdogs’ and customers’ radar screens, overfed valuations for animal drug businesses deserve their own health warnings.


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