As a sector, ASX-listed animal health companies make up only a small cohort on the local stock index.

Globally though, it’s a big industry. According to research from US consulting firm Grandview Research, animal health services — from veterinary clinics to pet products — was a $US47bn (~$67bn) industry in 2019, with an expected annual growth rate of more than 5 per cent.

In terms of the local market, that raises the question — do investors understand the space as well as they should?


Setting the record straight

Dr Chris Richards, managing director at $57m animal health & veterinary clinic operator Apiam (ASX:AHX), said the sector’s relatively niche status could sometimes lead to a lack of understanding.

“I think the animal health side’s probably not covered very well compared to other sectors,” Richards said. And he added that’s partly because there’s not a huge amount of activity to cover in the listed space.

“If you look at big pharma companies with animal health operations, they’re mostly listed in the US or Europe.”

At one point there were three ASX-listed veterinary providers, “but two of those providers were acquired by private equity the last couple of years, so there’s really no comparatives”.

“What’s also interesting is from a product point of view, the ones who are in the market on the ASX tend to be startups or new products so they sit in a higher-risk section of the market.”

Cannpal (ASX:CP1) CEO Layton Mills has had a slightly different experience in investor relations, stemming from his experience running an early-stage research company in animal healthcare.

After a multi-year R&D phase, the company plans to commercialise DermaCann — a hemp-derived cannabidiol (CBD) nutraceutical supplement for pets — by the end of 2020. It also has the global exclusive licence to MicroMAX, CSIROS’s micro-encapsulation technology, for the use in animal health.

As the CEO of an early-stage research company, Cannpal’s Mills has a different challenge to Richards when it comes to educating the market.

But he says the key priority when meeting with stakeholders is to clear up certain misconceptions — starting with the tendency to describe CP1 as a cannabis stock.

“What I try to say to investors is — don’t think of us as a cannabis company at all, think of us as an animal health company,” he said.

“Of course, some of our active pharmaceutical ingredients (APIs) are derived from compounds found in the cannabis plant. But from a consumer point of view, if a dog has a disease, their owner doesn’t care about what active ingredients are used, they care about the results.”

A third player in the sector is cannabis pharmaceutical company Creso Pharma (ASX:CPH), which includes an animal health range in its product suite.

Commercial director Jorge Wernli said investors should look for companies with a product portfolio that addressed “relevant needs for both the pet and owner, beyond just disease”.

“Key demand areas in pet health going forward will be for products that can assist with pet behaviour, chronic pain solutions, and also anti-ageing measures if possible — with products derived from natural ingredients to minimize collateral side effects,” he told Stockhead.


Patience is a virtue

Both Richards and Mills added that while they utilised the public markets to help build their business, their strategy required investors to take a patient approach.

For Cannpal’s Mills, that meant going to market to raise early stage finance.

“Knowing we were going to list the company, our strategy was clinical validation. So we knew it would be a while before we established revenues,” he said.

“That’s also when we entered into a two-year partnership with CSIRO. The result of that was we licensed some delivery technology that we’ve now incorporated into a product, which we’ve just commenced selling via Amazon into the US.”

Combined with the planned rollout for DermaCann, Mills said the company was establishing a track record of execution towards viable commercialisation pathways.

That path to growth can be somewhat contrasted against Apiam, which listed five years ago. Rather than an early-stage research focus, Richards said the company had adopted a fairly capital-intensive strategy to build a pathway to growth.

“If you look at Apiam we IPO’d at the end of 2015, and over the next four years we put significant capital into the business — building capacity with new processes and systems, and developing new products,” he said.

“In our sector, other companies have gone off market to do that. But what we do have now is our backend processes are totally in play.

“We’ve got significant infrastructure that will support at least 50 per cent growth, if not double our existing revenues.”


Looking ahead

Coming off the back of the 2020 summer drought as well as the COVID-19 disruption, Richards said the Apiam business had proven “pretty resilient” this year.

“Even with all that we posted 6 per cent revenue growth (to $111m) which flowed through to 31 per cent growth in net profit after tax, so I think we’ve shown it’s a pretty resilient business regardless of what happens to the market cycles in agriculture,” he said.

Looking ahead, Richards said the company was focused on developing new product lines in animal health, and had a $16m facility on hand to pursue strategic additions to its network of veterinary clinics.

“The business model is very simple in that its about having that efficient operating base, which we’ve been putting together over the last few years. Then it’s about increasing the number of animals we provide services to,” he said.

Richards added that “certainly over next 12 months we’d expect that we’ll make acquisitions as well”, with a focus on veterinary clinics in regional areas.

Mills said that as Cannpal moved towards commercialisation, it was targeting the US as well as the large Asian markets (China and Japan).

He added that the exclusive distribution rights to the CSIRO technology gave Cannpal a key “point of differentiation” in the market.

“You can’t replicate that,” he said. “There’s similar tech but nothing that’s been developed by CSIRO. You’ve got to have unique selling points and that’s one observation I’d make about the local cannabis sector.

“You’ve got 10 companies selling the same ratio of cannabinoids in oil or whatever it might be, but there’s no point of differentiation.”

Creso’s Wernli said when it comes to the growth in animal health, the driving forces are three-fold.

“The first factor is the increasing humanisation of pets — that is, the trend of pets considered as ‘family members’ and requiring advanced health management care,” he said.

Second, pet ownership rates are increasing across all major developed economies as the population ages. And increasingly, the good health of the pet is having a stronger influence on the health of the pet owner — therefore becoming a public health factor.”

More broadly, Mills highlighted the size of the global health market, where “the key thing is it’s consistent compound annual growth”.

As a case in point, he noted the strategic shift by $1.4bn supplements company Blackmores (ASX:BKL), which recently prioritised its pet supplement range with an eye firmly on opportunities in the Chinese market.

“When you look at the compound annual growth rate, the animal health sector has posted 4-5 per cent growth for more than 20 years in a row, and that was consistent even through the financial crisis,” Mills said.

“So it’s a big market and coming off the back of COVID-19, there’s a lot of macro tailwinds that are combining to make it more lucrative.”