Markets & Economy

Opportunity at the Vet’s Office

Coronavirus and the ensuing lockdowns have us all thinking about our homes more. This has meant relocating, redecorating, or trying to create the ideal environment for working and schooling from home, and for thousands of Americans, this has also meant adding a pet to the family.

Many households and individuals have turned their attention toward animals during the pandemic, creating an interesting investment opportunity. We believe the animal health industry has attractive investment potential for years to come.

Higher Spend from Humanizing Pets

Life for the household dog is a lot different than it was several decades ago. Life spans have increased, organic pet food options fill the shelves, and it’s no longer uncommon to drop the dog off at day care just as one would a child.

The humanization of pets has led to more individuals treating their pets like children. They’re members of the family, and owners are showing a willingness to spend more on the health and safety of their pets than they would on themselves, focusing on health and longevity, not price.

This creates a uniquely stable investment opportunity, because pet health is relatively inelastic. Our household animals need medication, tests, appointments, and emergency services and surgeries, no matter what the economy is looking like. We believe the industry can provide a combination of above average growth during economic expansionary periods, and defensiveness during downturns.

Analysis by Manning & Napier. For illustrative purposes only.

Benefiting from Trends

Within animal health, we’re finding attractive investments in the pharmaceutical and diagnostics spaces. Unlike their human counterparts, these companies face much less regulatory scrutiny and less political risk.

Pharmaceutical companies have a relatively high degree of pricing power. There are far fewer generic medications for pets than there are humans, and owners will have trouble finding substitutes. This creates great opportunity for companies who have well-established R&D departments, and well-established relationships with independent vet offices and veterinarian conglomerates. We believe these companies are likely to profit from continued drug innovation.

Diagnostics are critical in animal health because pets can’t tell us how they are feeling so veterinarians have to rely on testing to diagnose new issues, as well as treat and monitor existing ones. This testing leads to more testing as owners and vets identify issues and want to find out more.

These tests are a large money maker for vets so as they turn to new sources of profit, they’re more likely to recommend increased evaluation on household animals. We also expect these diagnostic companies to benefit as preventative care and focus on wellness become more popular and expand the market for testing. Internationally, there’s an even larger runway in diagnostics, as non-US countries have less infrastructure set up for testing.

COVID Acceleration

The humanization of animals and growth in pet health care was going on long before the Coronavirus hit, and the pandemic has accelerated these trends. Three trends we’re focused on are deurbanization, the shift to online pet health care, and a higher percentage of time spent with pets.

Deurbanization fueled by job and housing changes has meant more individuals moving to rural or suburban environments, which are often more conducive to pet ownership. It’s more popular to own one or more animals outside of cities. Landlords outside of urban environments may have lighter rules, and the prevalence of yards and increased space are making multi-pet homes more common.

The availability of online pet care (e.g., vet consultations, drug delivery, etc) is a positive for many companies in this space. Not having to leave the house can allow for more regular appointments, and subscription-based drug deliveries means more regular revenue for pharmaceutical companies.

Mental strain and more time at home caused by lockdown measures not only leads to the acquisition of more pets, but more time and focus on the animals themselves. Owners may be noticing more issues with their pets and bringing them to the vet’s more often. Switching to this preventative type care could lead to even better profit for certain pharmaceutical and diagnostic companies.

Demographics and the Long-Run

As time moves on, we expect to see these trends continue, accelerated by the pandemic in the short-term and fueled by demographics over the long-term. As more of the baby boomer generation become empty nesters and enter their retirement years, they may choose to add an animal to the family for company. As millennials wait longer and longer for marriage and kids, they may turn to pet ownership in the meantime.

Although we see a lot of opportunity in this space, it’s important to take a discerning look at each individual investment and avoid being fully swept up with trends. At Manning & Napier, we use our research experience to dig deep on the fundamentals of companies and choose only those who we see as most attractive for our clients.

For more insights on how COVID may be changing trends for 2021, be sure to subscribe to our Markets & Economy blog.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.