The United States is home to the world’s largest companion animal market, with an estimated 65% of households owning a pet.1 What’s more, pet owners are more willing than ever to spend money keeping their pets healthy, which has resulted in a durable growth trend for the animal health care industry.

  • The compound annual growth rate from 1980 to 2015 for spending on veterinary and related services was 8.9% compared with only 5.7% for all consumer spending.2
  • Annual “same store sales” growth in the pet health care industry has averaged 5.5% to 6.5% since 2008.2

Demographics are behind much of this growth. Fifty-seven percent of Millennials report that their pets make them happier than anything else, a markedly higher percentage than other age groups, and they demonstrate a willingness to forego discretionary spending on things like restaurants in favor of investing in their pets’ health.2

Finding Opportunity in the Mid-Cap Space

We’ve been investing in pet health care companies consistently for more than a decade, and believe that the trend’s long-term growth trajectory remains attractive. Within our Oppenheimer Discovery Mid Cap Growth Fund, we look for companies that have accomplished management teams, that are leaders in their fields, and that demonstrate financial health. The following three companies are examples of the high-quality companies we look for.

IDEXX Labs is the dominant player in point-of-care testing for companion animals, manufacturing fast, in-office diagnostic tests and related equipment to check for diseases such as heartworm. The ability to get results on the spot makes the tests popular with vets and pet owners, and increases the likelihood that pet owners will comply with recommended treatment plans, leading to better outcomes. IDEXX also has an extensive network of reference labs that process more complex tests. The firm also invests in innovation. For example, they recently rolled out a new diagnostic machine enabling vets to conduct in-office urinalysis, of particular importance for feline health as one in three cats dies from renal failure.

VCA operates the largest chain of veterinary clinics in the United States and has reference labs that compete with IDEXX. We’ve owned VCA for several years in both our Oppenheimer Discovery and Oppenheimer Discovery Mid Cap Growth Funds, and our shareholders have benefitted from solid growth during that time. The company received an acquisition offer in January from the Mars Corporation, which wants to expand their already-significant presence in the pet health care space, and offered a 31% premium over VCA’s previous closing share price to access the company’s attractive long-term growth potential. While we will be exiting VCA due to the pending acquisition, the stock has consistently beaten analyst expectations and delivered attractive, long-term revenue growth during the time we’ve owned it.

Zoetis is an animal pharmaceutical company that was spun out of Pfizer in 2013. About half of Zoetis’ drugs are sold to pet owners through veterinarians while the other half are bought by farmers to treat livestock. The company owns a large portfolio of drug brands with no one product overshadowing the rest. In our view, while Zoetis is unlikely to experience the windfall from a blockbuster product launch, it also has a more diversified portfolio than most drug companies that focus on human health care. In addition, generic competition is rarely a concern in the animal pharmaceutical industry due to lower price points than we typically see in the human pharmaceutical industry, so we believe they should be able to maintain their industry position in the future. The company has been a beneficiary of increased spending on pet health, and has a large pipeline of new products that, in aggregate, may provide a growth tailwind.

It is also worth noting that, compared with their counterparts on the human side, animal health care companies have the advantage of operating virtually free from the challenges associated with health insurance. Pet owners pay their vet bills and purchase their drugs in cash, at the time of service. For this reason, as well as those discussed earlier, we believe well-run animal health care companies can offer investors long-term sustainable growth.

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1Source: 2015-2016 APPA National Pet Owners Survey, American Pet Products Association.

2Idexx Growth Strategy Report, August 17, 2016.