Zoetis is giving a $2 billion vet deal the luxury treatment. The animal-health giant will on the face of it only get a measly return on investment from its acquisition, announced on Wednesday, of diagnostics firm Abaxis. It’s betting more owners globally will shell out big bucks on their pets – and so fluff up earnings. If not, $40 billion Zoetis will be nursing a dog of a deal.

Zoetis has done well since being spun out of Pfizer in 2013. Shares have more than doubled, handily outperforming the S&P 500. Health spending on pets is rising about 5 percent annually, as people increasingly think their animals deserve a similar quality of medical care as the rest of the family. Competitive pressures from cheap, generic versions of medicines are also more manageable. Zoetis spends about 7 percent of sales on R&D. Pharmaceutical firms usually spend more than twice as much.

The diagnostic market for pets is hotter. After all, Fido can’t tell the vet what’s wrong – so doctors and owners are happy to shell out for tests that definitively and rapidly diagnose a problem. That market is growing about 10 percent annually.

Subtract the net cash Abaxis has on its balance sheet, and Zoetis is paying about $1.8 billion. Analysts think the target should earn about $50 million of net operating profit next year. Take out taxes, and that’s only about a 2 percent return on the purchase. Some possible cost cuts might raise this figure somewhat, but financially the deal still looks more like beef byproduct than steak.

There’s a reasonable chance the deal may still turn into a tasty treat for Zoetis. Overseas sales only account for about 20 percent of revenue at Abaxis, but for more than half at the buyer. Rolling out the tests in new markets should yield faster revenue growth. Moreover, as countries grow richer, the number of pets increases – and owners spend a lot more money on their healthcare. It will take several years of double-digit expansion for the Abaxis to grow into the price Zoetis is paying, but the paws on this pup do seem promisingly large.

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CONTEXT NEWS

- Zoetis said on May 16 that it has agreed to buy Abaxis for about $2 billion in cash. At $83 a share, the price represents a 16 percent premium to the animal diagnostics firm’s closing price on May 15.

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(Editing by Antony Currie and Amanda Gomez)

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