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New IPO for the Dogs, Says Cramer

Wednesday, 23 Jan 2013 | 6:15 PM ET
Pfizer's Spinoff 'Zoetis' a Good Idea?
Pfizer is spinning off its animal health business as a separate company called Zoetis. Mad Money host Jim Cramer explains why investors should buy in.

Like the title of this post says, there's a new IPO that's for the dogs! It's also for the cats, the horses and a slew of other animals. But that doesn't mean it belongs in the doghouse. Not in the least.

In an effort to become a smaller and leaner company, Pfizer is spinning off its animal health business as a separate company called Zoetis.


Background

Zoetis makes anti-infectives, vaccines, anti-parasite medications, as well as medicinal feed additives and other pharmaceutical and non-pharmaceutical products for the animal health industry.

About 65% of the company's sales are livestock related, and the other 35% come from healthcare for dogs, cats and horses.

"Make no mistake, animal health is a huge business," said Cramer.

According to Pfizer, just vaccines and medicines for animals represents a $22 billion market. And after the spin-off, Zoetis will be the largest manufacturer of animal health products on earth, with roughly a 19% market share.

"In many ways, designing medicines for animals is actually a better business than coming up with drugs for humans. You don't need to do as many clinical trials, which means your products get to market much more quickly," Cramer said.

"Also most animal health customers pay out-of-pocket, so the insurance companies have a lot less leverage over Zoetis when it comes to reimbursement," Cramer added.

"And you also have less competition from generic drugs in this space, another big positive," he said.

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Lias McKelvie | Photolibrary | Getty Images

IPO

The deal is expected to price next Thursday, January 31st somewhere between $22-$25. At that range, the deal could raise anywhere from $1.89 to $2.15 billion, and it would value Zoetis at roughly $12.5 billion.

Cramer has crunched the numbers and he believes that Zoetis could be a $15 billion company. That means if the IPO prices as expected the stock could have about 20% upside from where it starts trading.

Therefore he said Zoetis could present an excellent opportunity, "I think this newly created company could be very attractive."

Cramer's Play

"My view here is that as long as you can get Zoetis for less than $26, you want to get in on the deal," said Cramer. "Remember, though, we don't like to play in the aftermarket, even with spin-offs, so if you can't get shares, don't try to snap this one up after it starts trading. Just keep your bat on your shoulders and wait for a pullback."

More Info

It's worth noting that Pfizer will still control Zoetis, holding as much as 80% of shares. But after the spin they will be two separate companies, with separate balance sheets. Therefore Zoetis will get its own independent valuation on the stock market

And, if you like Cramer's idea but think Zoetis presents too much risk Cramer said, "you can always just buy Pfizer right now, right here. Remember, Pfizer's going to own most of this company I think Pfizer's terrific, and this spin-off will only make it better."


Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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