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The Investor’s Guide to Zoetis Inc (ZTS): Pfizer Inc. (PFE), Merck & Co., Inc. (MRK)

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Looking for the hottest name in health care? Right now it’s not big pharma nor even a hot biotech firm making waves on Wall Street; it’s newly minted animal health firm Zoetis Inc (NYSE:ZTS). After shares of Pfizer Inc. (NYSE:PFE)‘s former animal health division zoomed out of the gate following its IPO, investors are looking to know more — particularly with its niche in an unheralded industry. What are Zoetis’ prospects for the future — and which rivals can you expect this company to butt heads with in coming years?

Zoetis Inc (NYSE:ZTS)Getting down to the basics
First off, what exactly does Zoetis do?

Pfizer’s former division handles all things animal health — including creating immunodiagnostics; producing vaccines and other therapies for pets and companion animals, as well as farm animals; and making genetic testing solutions to aid in managing livestock. It’s a broad and somewhat spread out portfolio of products, but Zoetis’ business is no slouch.

As a part of Pfizer, Zoetis had no trouble posting strong sales. The unit recorded almost $4.3 billion in revenue for Pfizer in 2012 at 3% growth — 6% with currency fluctuations taken into account. It’s the largest player in the animal health sector, and that size is a key strength in the $22 billion animal health industry it rules.

Investors certainly thought so, as Zoetis’ stock — which touted an offering price of $26 — opened last Friday’s trading at more than $31, jumping 21%. The $2.2 billion that the IPO ended up raising was the biggest offering since a certain social network went public back in 2012. Demand soared for the stock offering early on, and investors who got in early can’t be at all dissatisfied by the way things have gone so far.

Zoetis’ popularity is helped by its strong projections. The company expects annual growth of 5.7% through 2016, not a glamorous number but more than enough to reinforce Zoetis’ position atop the animal health industry. Its global reach — Zoetis operates in more than 60 countries worldwide, including some emerging markets — and expectations of future growth from its livestock business have investors sitting pretty. Pfizer, which controls around 80% of the company in its post-IPO life, looks like it made just the right move to unlock shareholder value with the IPO.

But what will Zoetis’ competition have to say about its rosy projections?

The rivals aren’t going away
A few familiar names dot the list of Zoetis’ rivals — but none have the size of the new kid on the block.

Sanofi SA (ADR) (NYSE:SNY) might be Zoetis’ most dangerous competitor. The company’s animal health branch, Merial, grew full-year 2012 sales by more than 3% to over $2.9 billion. Merial’s production animal business has especially surged recently, pulling in more than 5% sales growth over the entirety of 2012 and double-digit growth in the fourth quarter alone. That could be a tough opponent for Zoetis’ lofty goals for its livestock business.

The real power behind Sanofi’s unit lies in emerging markets. Merial’s emerging market sales in the fourth quarter equaled more than a third of total revenue, with growth of more than 17%. The company’s not sitting on its laurels, either: Sanofi agreed to purchase the animal health business of India’s Dosch Pharmaceuticals late last year, giving it an entry point into a massive and growing market. If Sanofi continues to capitalize on emerging markets in this way, it’ll soon have Merial going toe-to-toe with Zoetis in coming years.

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