Zoetis to buy veterinary diagnostics firm Abaxis for $1.9 billion

(Reuters) - Top animal health company Zoetis Inc ZTS.N will buy Abaxis Inc ABAX.O for $1.9 billion, looking to capture a bigger slice of the fast-growing market for diagnostics services that cater to household pets and farm animals.

FILE PHOTO: Zoetis CEO Juan Ramon Alaix gives an interview following his company's IPO on the floor of the New York Stock Exchange, February 1, 2013. REUTERS/Brendan McDermid

The deal announced Wednesday reflects Zoetis’ expectation that the diagnostics category will grow at a faster pace than the broader animal health industry.

Abaxis — which makes blood and urine tests to predict, detect and treat diseases such as heartworm, Lyme disease or tick-borne infections — will also help its New Jersey-based acquirer bolster its presence in overseas markets.

Zoetis faces much lesser competition internationally than in the United States, its Chief Executive Officer Juan Alaix said on a conference call with analysts.

“The characteristic of patients in animal health is that they don’t speak. So in our industry, almost every animal getting into clinics needs to have a diagnostic test,” Alaix said.

The veterinary diagnostics market worldwide is expected grow to $3.6 billion in 2022 from $2.3 billion in 2017, according to research firm MarketsandMarkets here.

By contrast, the global animal medicines and vaccines market is worth around $30 billion, according to veterinary consultancy Vetnosis.

Much of Zoetis’ revenue is driven by its animal dermatology business, and diagnostics contribute just under 1 percent of its overall annual revenue of more than $5 billion.

On Wednesday, Zoetis' shares fell 0.5 percent, while shares of IDEXX Laboratories Inc IDXX.O, Abaxis' biggest competitor, fell 3.7 percent.

“We believe this is a good deal for Zoetis although the valuation seems high,” BMO Capital Markets analyst Alex Arfaei said.

Shares of Abaxis rose as much as 16 percent to an all-time high of $83.24, inching past Zoetis’ all-cash offer price of $83 per share.

At seven times Abaxis’ annual revenue, the price Zoetis is paying is already “pretty steep,” said C.L. King and Associates analyst David Westenberg. “If there’s another bidder, I don’t think Zoetis would go any higher,” he said.

However, should there be a rival offer, the companies most likely to make a bid would be Eli Lilly and Co's LLY.N animal health unit Elanco or candy and pet food company Mars Inc, Westenberg said.

Other possible bidders include dental supply firms Henry Schein Inc HSIC.O and Patterson Companies Inc PDCO.O, which also have animal health divisions, he added.

Zoetis plans to fund the acquisition through cash and new debt. It expects the deal to close before the end of the year and Abaxis to add to its earnings in 2019.

Reporting by Tamara Mathias in Bengaluru; Editing by Anil D’Silva and Sai Sachin Ravikumar