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Net Net: Promoting innovation and managing change

Ackman bets big on cows, chickens, cats

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Fresh off a big win from investing in medicine for humans, Bill Ackman is now focused on pharmaceuticals for animals.

Pershing Square Capital management recently disclosed an 8.5 percent stake in Zoetis, which makes animal medicine and vaccines that are bought by veterinarians, livestock farmers and other animal owners.

Ackman praised Zoetis in a Nov. 25 letter to Pershing Square clients. "Zoetis' business model passes Pershing Square's high bar for business quality," he wrote.

The letter also said that Zoetis' product portfolio is "highly durable" and that competition from rival generic-drug makers was "minimal." Animal health products, Ackman noted, are produced at a relatively low volume with smaller profit margins, benefiting established brands like Zoetis.

'Scarce asset'

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The company spun out from Pfizer in 2013 and had revenue of $4.6 billion last year.

Ackman added that Zoetis is a "scarce asset" and compared it to Pershing's Square's successful investment in alcoholic beverage company Beam.

Pershing Square is working on Zoetis with Sachem Head Capital, a more than $2 billion activist investor led by Ackman protege Scott Ferguson. Together, the two hedge fund firms own about 10 percent of the company. Pershing Square said it paid $1.54 billion for its stake, according to a news release.

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So far, so good: Zoetis stock is up about 18 percent over the last month. It will take a lot more, however, to match the success of Allergan; Ackman estimated that he and his investors will pocket about $6 billion from the merger of drugmakers Allergan and Actavis.

"We look forward to beginning a dialogue with Zoetis' management and board, as we work together to maximize value for Zoetis shareholders," Ackman wrote in the letter.

Spokesmen for Pershing Square, Zoetis and Sachem Head declined to comment.

The company, though, has mirrored Ackman's optimism.

"Zoetis has become the world leader in the $23 billion market for animal health medicines and vaccines based on our unique combination of capabilities, our diverse portfolio of more than 300 product lines, our global presence in 120 countries and critical investments that we have made in our operations," said CEO Juan Ramón Alaix in a Nov. 18 statement.

"Our financial strength, strong performance as a fully independent company and prospects for growth as the market leader position Zoetis to continue delivering sustained value to shareholders."

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The Pershing Square Holdings Ltd. fund is up 35 percent this year through October, according to the letter. That compares with a 1.64 percent gain for the Absolute Return Event Driven Index, which tracks the performance of similar hedge funds.