Many investors who are interested in the animal health space still feel they don’t know the industry well enough to make smart investments. The feeling is understandable. Animal health is an industry driven by two sectors, pets and livestock, that respond to very different market forces.
Not only is the industry complex, it’s new. It wasn’t so long ago that what we now call the animal health industry was little more than a handful of corporate divisions within the larger pharmaceutical players. That was until Zoetis went public in 2013 at $2.2 billion, the largest IPO since Facebook. After that, there could be no doubt of the strength and independence of the market for animal health products.
Strategic investors such as Syngenta, Monsanto and DuPont have corporate venture arms that represent the largest and most active pool of capital in the industry. Considerable growth and consolidation has created a few large animal health companies generating multi-billion-dollar revenue. But as consolidation continues among both animal health companies and their strategic investors, R&D budgets are coming under greater strain.
In a recent Fortune interview, Allergan CEO Brent Saunders noted that big pharma companies are increasingly outsourcing their innovation to startups in response to this reduction in R&D spend. The same principle now applies to animal health companies. And by extension, the growing startup sector of the animal health industry is drawing the attention of VCs and private equity players who see the same opportunities that the larger strategic investors do.
The trends in the animal health industry’s pet and livestock sectors need to be parsed separately to get a clear view of the investment landscape, but it is also important to pay attention to factors, such as technology trends, that affect the industry as a whole.
Livestock Sector: The Push for Alternative Proteins
Despite being heavily regulated and dominated by a few consolidated players, typically a recipe for inertia, the livestock sector is evolving rapidly. Consumer demands for the reduction or elimination of antibiotic use in raising livestock has moved out of activist circles and into the mainstream, with major industry players like Tyson and Perdue making moves to respond to this shift.
At the same time, the industry is moving to increase food production to meet the projected demands of a rapidly growing population. Not only are there more mouths to feed, but a greater percentage of the world population is entering the middle class, which implies a diet that is more focused on animal proteins like beef and pork. The demand for these more resource-intensive meats doesn’t easily align with the need to use the world’s finite supply of arable land as efficiently as possible, much less with the developed world’s pushback against antibiotics.
A new market for alternative proteins looks to realign those incentives. This market encompasses the production of novel sources of protein for food or animal feed use, including everything from baking flour made of crickets to the production of meat protein from cell-based cultures. The alternative protein industry has come a long way from veggie burgers, with companies like Modern Meadow and Beyond Meat attracting considerable investment and attention as they develop meat replacements from non-animal sources. It has also expanded to include novel sources of protein in livestock diets, which has the potential to reduce the percentage of crops used as feedstuffs.
The industry is still in its fledgling stages and has a great deal to prove. But it is driven by demand for solutions to food scarcity, cost and environmental impact issues that will only become more urgent as the population grows. The production of a novel protein sources that can satisfy increasing demand for meat-centered diets without further straining agricultural resources could open the door to greater human food production that can sustainably fulfill ever-rising demand.
Pet Sector: U.S. Owners Spending More on Quality of Life
If the livestock segment of animal health is being driven by the need to meet daunting global challenges, the pet segment is responding to a fuzzier, more loveable demand growth. In the United States, according to the APPA National Pet Owners Survey, 68 percent of households now own a pet, up from 58 percent when the survey started in 1988.
Not only do more people own pets, but they’re spending more on them, with total U.S. pet industry expenditures projected to rise by almost $3 billion to just over $69 billion in 2017. Today, 60 percent of the revenue of U.S. animal health companies comes from companion animal products, and 40 percent comes from livestock products. In the rest of the world, these proportions are reversed.
It would be a mistake to view these expenditures as mere luxuries. U.S. pet owners are willing to spend more on their pets primarily because they are seeking products that will let their pets live longer, healthier lives. This market opportunity is driving new business models and is leading to the establishment of new companies focused on pet products.
The Internet of Animals
By sourcing their innovations from startups, big animal health companies are creating more opportunities for technology to penetrate both the livestock and pet sectors of the industry. As sensors become more inexpensive and high-speed mobile broadband is nearly ubiquitous, the Internet of Things is poised to change the way we approach animal healthcare.
In the pet sector, we are already seeing a growing market for wearable activity and health monitors, as well as remote monitoring and video-enabled engagement. In livestock, similar monitoring solutions offer more robust data analytics that give producers real-time insights on how and when to intervene in the care and feeding of their animals. In both sectors, this flood of new data is improving the way owners communicate with their vets, giving rise to a host of telemedicine apps targeted at veterinarians.
In the future, a connected pet wearable may well be able to catch health issues before they become critical and automatically make a vet appointment. Meanwhile, a rancher will be able to map the movements of his herd with an app, overlaying in-depth biometrics to highlight and prioritize the day’s work items. Technology will continue to drive improvements in animal care and reduce costs as the pet and livestock sectors of the animal health industry find new solutions to the demands they face.
The expansion of the Internet of Things into an ever-more connected digital ecosystem will enable more engagement and connectivity with pets and livestock, improving the efficiency of food animal production.
An Evolving Ecosystem
Each of these trends alone yields opportunity for investors and continued industry expansion of the now $24 billion market. Together, as major components of the Animal Health ecosystem, these trends are pulling more innovation from start-ups across the globe and rapidly advancing those innovations into the marketplace. Unlike what we are seeing in the crop side of Agriculture technology, expect continued acquisitions and large-scale investments fueling an expansion of the Animal Health ecosystem.
About the Author
Michael Helmstetter – Co-Founder, President and CEO
Dr. Michael Helmstetter serves as co-founder, president and CEO of Technology Acceleration Partners (TechAccel LLC). Michael has over 28 years of experience working in the agriculture, defense and biotechnology industries. Prior to joining TechAccel, Michael was the CEO of MRIGlobal, where he established an aggressive five-year strategic plan that included a dramatic shift in the way MRIGlobal manages research projects, as well as adding capabilities to serve as prime contractor and thus the direct interface with each customer. Combined revenues for MRIGlobal grew from $322 million in 2008 to $683 million in 2012. Michael has also held a series of laboratory management positions at Applied Marine Research Laboratory in Norfolk, Virginia, before becoming the Program Manager for the Harbor Branch Oceanographic Institution in Fort Pierce, Florida. Michael received a Ph.D. in Chemical Toxicology/Oceanography from Old Dominion University in 1992 and a B.S. in Biology from Allegheny College in 1986.