It is no secret that people love their pets. What is surprising is how much pet owners will spend to keep Rover and Whiskers¹ healthy. Of the top ten animal health companies, no fewer than eight are subsidiaries of large pharmaceutical corporations. Although they provide no more than 4 to 5 percent of their parents’ sales, their contribution to corporate profits can be quite substantial because human treatments, though expensive to develop, can be applied to animal care at a relatively low cost. Even so, the profits can seem small to major pharma companies, and some of them are thinking about divesting these subsidiaries in order to focus more on their human drug business. But our research indicates that animal health divisions could be worth keeping.

Forecasts suggest that the US market for pet products and services—the single biggest, with more than 54 percent of worldwide sales—will reach almost $36 billion by 2007, for an annual average growth rate of 4.5 percent (Exhibit 1). The animal health businesses of the major pharma companies have two parts: one for production animals and one for companion animals such as dogs and cats. Sales by veterinarians—the single most important channel by far—of health products for companion animals have recently gone up by 12 to 15 percent a year in the United States. Vets prescribe a range of medications, some of which, such as antiparasitic treatments, are also available over the counter. US sales in 2002, at prices leaving the factory, are estimated at about $2.4 billion.

One reason for the growth in sales of pet products and services is the changing lifestyle of pet owners in the richer developed nations, where animals are increasingly seen as family members—a development tied in part to the fact that more people live on their own, to the slowdown in human birth rates, and to urban alienation.² Furthermore, the main years of pet ownership fall in the fastest-growing part of the US population: the 45- to 64-year-old segment, which has the highest household income. Research in the United States also indicates that people in the 45- to 54-year-old age bracket with annual household incomes upward of $50,000 are far more willing to spend money on their pets than are people in other income groups (Exhibit 2).

In recent years, most of the growth in sales of health-related products for animals has come from antiparasitic treatments. Active ingredients not previously used in veterinary medicine offer improved results against parasites that live on the outside of animals. The rapid consumer take-up of such products has encouraged some manufacturers to work on more sophisticated treatments. Hence, the development pipelines of most leading companies are well stocked with innovative new products:

• Health basics. Antiparasitic products will continue to be a major category, since all companion animals face the problem of infestations. The key issues for consumers are convenience, safety, and efficacy. New products that conveniently treat and control both internal and external parasites simultaneously will probably drive the market for health basics. The biologicals sector, including products such as vaccines, sera (concentrated blood extracts), and diagnostics, also has bright prospects. The opportunities of the future lie not only in bacterial and viral vaccines but also in vaccines that are capable of controlling, for example, fleas or heartworms.

• Age-related and chronic conditions. As the average age of the pet population rises, the market for products treating age-related and chronic conditions is going to grow steadily. In the United States, approximately 20 million dogs and the same number of cats are thought to be older than nine years, and about half of these animals suffer from age-related illnesses.

  Such conditions are treated with off-label human pharmaceuticals, but the range and efficacy of products registered for animal use (including drugs for arthritis, kidney problems, and cardiovascular conditions) will continue to grow. A wild card is the development of therapies for treating canine cancer: it remains an open question whether consumers will pay $2,000 to $3,000 for a onetime chemotherapy treatment for their pets.

• Lifestyle issues. Large numbers of pet owners object to dogs and cats shedding their hair around the house, smelling bad, scratching themselves all day, making a great deal of noise, getting fat, or producing offspring the owners don’t want. Given the present level of these unmet needs, we expect that by 2010 the market for prescription products that deal with them might be as large as $750 million.

  The biggest opportunity in this category is professional antiobesity treatments (excluding diets), a market that alone could be worth more than $300 million. The products— appetite suppressants and metabolism enhancers—that drive the growth of this category are mostly crossover candidates from human research. The second-largest opportunity might be products (for instance, vaccines) for reversible reproduction control in dogs and cats; today, two-thirds of US pets are spayed or neutered. Other possibilities include products that reduce the allergic properties of pet hair or saliva.