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APPA expects that US$37-billion of spending this year, or 26 per cent of the total, will go into veterinary care, which includes an ever-increasing array of services.

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Companion animals were a welcome distraction from the hard realities of COVID-19 lockdowns, leading to a surge in pet adoptions and related spending on veterinary services. But experts say there are continuing opportunities for investors with the sector’s growth as more U.S. households have pets than children.

Evidence of how much the pandemic changed things shows up in overall spending on companion animals in the U.S., the largest global pet market. Between 2020 and 2022 spending rose 26 per cent to US$136.8-billion, according to the American Pet Products Association (APPA). It projects a 4 per cent bump this year to US$143.6-billion with pet food, treats, veterinary and related services accounting for almost two-thirds of the total.

Analysts say the sector offers steady growth and an expanding array of services.

Millennials are now the single largest pet-owning group and view their companion animals as family. That means a willingness to pay for top-quality food and accessories, frequent checkups at the vet and diagnostic tests as needed. Rising incomes in the developing world are adding more power to the overall trend.

“The pandemic drove growth in animal health care stocks and that growth really hasn’t gone away,” says Paul MacDonald, chief investment officer of Harvest Portfolios Group Inc. in Oakville, Ont.

“Although the rate of change of things like vet visits has slowed from the pandemic peak, we’re still well above 2019 levels and that longer-term companion animal thesis is still very much intact.”

Harvest holds two pet pharma companies in its Harvest Healthcare Leaders Income ETF HHL-T. One is Parsippany-Troy Hills, N.J.-based Zoetis Inc. ZTS-N, the largest pure animal pharma company, which Pfizer Inc. spun off in 2013. Zoetis is having a good year with its shares up 10 per cent year-to-date.

The other is Merck & Co. MRK-N, which operates its animal health care business as a division within the larger company. It generates about 10 per cent of Merck’s overall revenue. Merck’s shares are down 1 per cent year-to-date.

Simeon Hyman, global investment strategist for ProShares ETFs based in Bethesda, Md., agrees with the thesis that the pet industry has several energizers. ProShares markets the only pure-play pet exchange-traded fund (ETF) – ProShares Pet Care ETF PAWZ-A, which holds Zoetis and Merck.

Another large holding is Elanco Animal Health Inc. ELAN-N, which was spun off from Eli Lilly & Co. in 2019. It’s the second-largest pet pharma company after Zoetis, but has performed poorly since the spin-off. Its shares are down 34 per cent year-to-date and 65 per cent in the past 12 months. Elanco has had problems with key products and has lowered its earnings estimates for the year.

More growth ahead

Mr. Hyman is optimistic about the industry. “Any pet economy statistic you look at shows pretty impressive growth, whether it’s in dollars or in participation,” he says.

He points to a recent report from Bloomberg Intelligence, which noted that the global pet economy will grow to just less than US$500-billion by 2030, which is 54 per cent higher than today. Morgan Stanley likewise noted that there are five million more pets in the U.S. than pre-pandemic.

Mr. McDonald of Harvest says the companion animal industry is unique in part because the animals “are taking a higher status within the family.” That translates into higher spending to keep the pets healthy.

The lockdowns helped change attitudes toward companion animals because people spent more time with their pets and became more aware of their needs. This “humanization of pets,” as Mr. Hyman calls it, has led to more regular checkups, diagnostic tests and better quality food and treats.

APPA expects that US$37-billion of spending this year, or 26 per cent of the total, will go into veterinary care, which includes an ever-increasing array of services. One beneficiary of this trend has been Idexx Laboratories Inc. IDXX-Q, another top holding in ProShares Pet Care ETF. Idexx markets a range of diagnostic tests for companion animals and livestock. Its shares are up 16 per cent year-to-date and 20 per cent in the last 12 months.

How economic headwinds could affect the sector

Analysts are watching how a slowing economy will affect the sector. As interest rates have risen and household incomes have been squeezed, the question is how much discretionary spending families will direct toward their companion animals.

Mr. McDonald expects some movement away from higher-end food to cheaper products. Families might also make fewer wellness checkups or opt for fewer diagnostic tests.

“The question is what component of pet spending is truly discretionary? In the short term, the diagnostic side is probably more cyclical than the drugs and treatment side,” Mr. McDonald says.

He expects the pharmaceutical side to be strong because it offers what he calls a superior good.

“If I know a particular drug for fleas and ticks is better, I’m going to give it to my dog,” he says. “I will find a way to make that happen.”

So, what are the innovations to watch? Mr. MacDonald says new drugs, which are relatively fast to get to market and such things as monoclonal antibodies, pain medications and osteoarthritis treatments for older animals.

For investors, the question is how to capture the industry’s potential. Not surprising, both analysts believe a diversified basket is the best way because it offers a balanced approach to the sector.

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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