As Bob mentioned last week too, the vibe I am feeling is that 2024 is off to a strong start. There are good signs for the industry: inflation is down, a soft landing seems possible and the people in the industry seem positive. I wonder, however, if the industry might be nearing a crossroad.
As I review quarterly earnings reports from the public animal health companies, I see companies increasing prices in the 4-6% range. This is higher than we saw in the pre-pandemic period. Some of the rationale for these increases tie back to manufacturing cost increases. Another reason for the price increases is the inability to grow volume.
Savvy investors are concerned with the quality of earnings, focusing on topline growth vs. expense reductions. When digging into sustainable revenue growth, investors are much more interested in volume growth vs. price growth. Manufacturers who rely on price increases on existing products to drive revenue growth may eventually be put in a precarious position when consumers reach a breaking point and trade down to generics or, shift purchases to new technology. In the end, the lifeline for the Animal Health industry is innovation. Innovative new products and technology always have commanded premium pricing and continue to fuel future expansion.
Continuing to Invest in R&D is critical for long-term success. Let’s see what materializes in 2024 and beyond from the hundreds of millions of dollars spent on R&D. That’s where the industry’s sustainable growth will come from
Randy Freides
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