Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm Chris Schott from JPMorgan and very pleased to be introducing Zoetis today. From Zoetis, we have Kristin Peck, Chief Executive Officer and her first presentation as CEO at JPMorgan. So with that, I'll turn it over to Kristin.

Thank you. Thank you, Chris. Thanks, everybody. I'm excited to be with here today as I step into my new role as CEO of Zoetis. I've been with the Zoetis since its founding, and I've held a number of roles over those years, overseeing our commercial development, manufacturing and supply chain, our global diagnostics and our global poultry businesses and most recently, as our group President for U.S. operations, business development and strategy. The past 7 years have been an incredible journey for Zoetis. As we built a global industry leader, we've expanded into new businesses, and we grew faster than the market. We've established a consistent track record of delivering strong returns for our shareholders. We're on a strong path of value creation and with a proven strategy, a relentless customer focus and market-leading innovation, but we're just getting started. As the animal health landscape continues to evolve, we see many opportunities for Zoetis to build upon our market leadership, deliver innovative new solutions and create greater value, veterinarians, livestock producers and pet owners around the world. But before I talk about some of these opportunities and our plans going forward, I need you to remind -- I need to remind you of some fun housekeeping items. So my comments today will include forward-looking statements and non-GAAP measures. You can find more information on these risks and a reconciliation of the non-GAAP numbers in the slide deck we published this morning and an SEC filing on our corporate website. Okay. So let's dive in. I'll start with a quick overview of Zoetis and its strong value proposition for those of you who are not as familiar with our company, and then I'll cover some of my focus areas as we drive our strategy forward. Afterwards, Glenn and I are happy to take your questions in the Georgia room across the way. First, Zoetis is a clear leader in global animal health with more than $6 billion in annual revenues, growing faster than the market. Our long-term goal is to continue to lead the market and outpace industry growth rates. And our outlook is supported by attractive and steady market fundamentals, which I'll talk about shortly. We have a diverse and durable portfolio, and we're well positioned to address the market dynamics with leading products and innovative R&D programs, complemented by external innovations across the continuum of care. Our portfolio of leading product lines, covering 8 species and including 12 blockbusters currently in the market, which generate more than $100 million each in annual revenue. In the last 5 years, we've introduced more than 1,100 new products and life cycle innovations and have continued to invest in future innovations. We have direct operations in about 45 countries which is proving to be a key competitive differentiator for us. Our field force colleagues serve as expert hands-on partners for our customers, receiving among the highest rankings in the industry according to our customer surveys and generating strong demand for our products. Our company has industry-leading capabilities, a proven business model and a track record of execution and investments that has helped us deliver strong financial results and shareholder returns. And as CEO, I intend to build and drive forward on this strong foundation. Critical to this goal is that we remain agile and forward thinking to address the changing industry dynamics and customer needs in animal health. So let me quickly cover some of the demographic and market trends that are shaping our thinking and investment plans for the coming years. When you look across animal health care, it is one of them. Animal health is one of the most appealing sectors based on the consistency and predictability of its growth drivers. We compete in a large global market, which is steadily growing, continuously evolving and creating new growth areas for us to conquer. Our addressable market opportunity is over $40 billion, including the traditional markets we've been in for decades, such as medicines, vaccines, parasiticides and medicated feed additives and smaller but fast-growing areas where we are expanding, such as diagnostics, biodevices, genetics and precision livestock farming. On average, our traditional market segments grow at around 4% to 6% annually, while double-digit growth is expected in many of the expanding markets where we compete. Among the drivers of the sustained demand is the growing global population, which is expected to increase from $7.7 billion today to over $9.7 billion by 2050. The growing middle class, including more millennials and Gen Z populations increasingly view their pets as family members and exhibit more willingness to spend on their pets' health care needs. Protein consumption is also growing. And even with the increased interest in plant-based or lab-based needs and other protein alternatives, animal-based proteins will remain critical to meeting the demand of the world's growing population. And while we expect to see faster growth in developing markets, advances in animal health care, increased medicalization rates, technology adoption and greater animal protein exports are trends that will be driving growth in more mature markets as well. And with all these demographics and trends, there is naturally more opportunity for Zoetis to serve our customers in both livestock and companion animals. So moving to some of the rising trends that are shaping the future of our industry. For livestock producers, specifically, there is certainly no shortage of challenges that we're trying to solve for them in an evolving operating environment. From the need of more efficient production and farming methods and ways to address a shortage of labor, to increasing profitability of their practices, harnessing big data to drive smarter decision-making and fighting emerging infectious diseases that threaten the health of their animals and the viability of their businesses. At the same time, there is a clear need to increase global access to veterinary care and to accelerate innovation. Innovation that will create more sustainable practices and solutions with less environmental impact and meet greater standards for food safety and animal welfare. In companion animals, pet care is becoming increasingly more humanized, and Zoetis is at the heart of enabling greater connections between animals, vets and their pet owners. We're looking to serve as the catalyst for more advanced treatments, for diseases and specialty care, new and more convenient health care delivery methods and engagement channels and greater use of technology and real-time data-driven insights that improve health. In both livestock and companion animals, we're also seeing health care solutions being increasingly powered by digital capabilities and data analytics and becoming increasingly interconnected with greater integration across prediction, prevention, detection and treatment. With that backdrop, let's move on to why we think Zoetis is well positioned to capitalize on the many growth opportunities in animal health. As you see on Slide 6, Zoetis is the worldwide animal health leader based on revenue, with strong market positions across species, therapeutic areas and geography. By species, we have a #1 position in companion animal, cattle, swine and fish products, which, in fact, make up nearly 90% of our total revenues. We also lead in key markets globally, including #1 positions in North America, Latin America and Asia. This leadership gives us deep and valuable customer insights across markets, species and the continuum of care, while generating the financial strength and flexibility to invest in the next generation of products and services for our customers. The strength of our portfolio is also driven by our disciplined management approach. Zoetis is always focused on building a powerful mix of new products and life cycle innovations, to sustain our market leadership and above-market growth rates. We have a broad portfolio of approximately 300 product lines across 5 therapeutic areas and 8 species with established leadership positions, as I've mentioned. Furthermore, our leading brands represent more than 1/3 of all blockbuster products in the market. And a blockbuster in animal health generates more than $100 million in annual revenue. We also have the most diversified portfolio in the industry, with our top 10 products accounting for around 40% of our total revenue. This diversity positions us well for various market conditions and evolving customer needs. Another key characteristic of our animal health portfolio is the durability of our products, which have an average market lifespan of about 29 years if you look at our top product lines. And this is a testament to the focus on life cycle innovations and continued demand for our leading products. For example, our blockbuster product line like the anti-infective DRAXXIN and anti-inflammatory RIMADYL are each more than 15 years old. And while we generate durable revenue streams from these type of established product lines, we also continuously strengthen our portfolio through new products and life cycle innovations. These can include improving and extending platforms across new species, developing new formulations or routes of an administration and expanding into new markets. We've introduced over 1,100 new products and life cycle innovations in the last 5 years, and we continue to build on our leading portfolio, including recent life cycle innovation in pesticide franchises, such as Simparica, Revolution and ProHeart. At Zoetis, our innovation is discovered and developed, both through internal R&D and external business development. We are building and integrating a unique set of capabilities and assets to address our customer needs from prediction and prevention to detection and treatment for what we call the continuum of care. In prediction, we developed genetic products like CLARIFIED Plus, which helps our dairy farmers identify wellness treats that enable better management, selection and breeding decisions. In prevention, we're strengthening our portfolio of vaccines and parasiticides, resulting in increased efficacy and broader application across more species. And as you know, we're preparing for the launch of Simparica Trio in the EU later this quarter and in the U.S. as well, pending approval. This product is a key internal innovation that combines flea and tick treatment with the prevention of heartworm disease and the treatment of gastrointestinal parasites. We expect to be the first to market in the U.S. with this type of combination product, and we believe it has significant blockbuster potential. We're also working to expand market approvals for our new vector vaccine franchise, Poulvac Procerta HVT-ND for poultry, and we expect additional offerings in our vector vaccine franchise in the coming years. In other vaccine research, we established a new R&D facility with Texas A&M University to develop transboundary and emerging infectious disease vaccines. This includes an initial focus on foot-and-mouth disease, which can cause illness in cattle, pigs and sheep. We're also excited to explore livestock immune systems as part of a new partnership with Colorado State University. In our work there, we will target new immunotherapies that could become alternatives to antibiotics in food-producing animals. Our initial research will focus on potential biotherapeutics for cattle, which could yield broader implications for swine and poultry in the long term. And last year, we also acquired a nutrition-focused animal health business called Platinum Performance. It brings us premium nutritional formulas and a unique approach to the field of scientific wellness for horses, dogs and cats. The addition of Platinum will further strengthen and diversify Zoetis' portfolio in the equine and pet care markets and provide further insights into how a wellness regimen can help nurture and maintain healthier animals. In addition, we've made significant investments in detection capabilities, acquiring Abaxis, a leader in point-of-care diagnostics in 2018, and more recently, getting into reference lab operations with the acquisition of Phoenix Lab and ZNLabs in the U.S. We believe that by building a more holistic Zoetis diagnostics portfolio and pairing it with our preventatives and treatments, we can provide veterinarians with more valuable services and insights into the care of their animal patients. We're also continuing to expand and grow our strong portfolio of medicines for treatment of pain and skin conditions in companion animals. We've been advancing our monoclonal antibody program for osteoarthritis in dogs and cats as well as looking for new solutions to treat and control illness in livestock. And as technology advances and its adoption accelerates across markets, we are investing to develop innovative capabilities in sensor technology, robotics, automation and digital and data analytics. These capabilities will help us differentiate and further integrate our offerings and services to help deliver more efficient and better outcomes for our customers. For example, we are increasingly focused on digital and data solutions that can help our customers measure key health and performance indicators for their animals to detect potential issues sooner and provide earlier and more individualized care to the affected animal. We are making important progress in areas such as precision livestock farming with our Smartbow system, and we plan to lead the way in digital through partnerships with our customers and technology companies outside of animal health. In short, we believe innovation is to -- going to come from many different sources, both from internal R&D and targeted businesses development, and we continue investing in the most promising opportunities. In addition to digital products like Smartbow and our poultry biodevices, we are also transforming the customer experience in animal health by rethinking how we engage and do business with our customers. A key part of this is connecting with our customers where they are and not only at traditional physical touch points, but through digital and online channels. Like all aspects of the economy, vet and pet owner engagement in social media, online communities and digital product research are increasingly driving pet care decisions and dietary choices. And our investments in digital and data analytics will allow us to increase efficiencies by enabling greater transparency, automation and data insights across our business and for our customers. We've also introduced a new marketing cloud software, which generates data insights that help us better understand our customers' needs. Ultimately, we can deliver tailored solutions and services with greater personalization relevance and consistency. We're also focused on reaching new customers through digital channels that complement our direct touch points. For example, our Zoetis U.S. pet care rewards program has enrolled over 1 million pet owners and pets who get redeemable points for use on products and services at their veterinary clinics. Now let me turn to some of the financials. Our strong diverse portfolio and commitment to continuous innovation, enabled us to deliver operational revenue growth that has outperformed the industry since our inception in 2013. For the last 7 years, the traditional animal health industry has grown on average between 4% and 6% operationally, with Zoetis growing faster than the market at around 8% operationally for the same period. In 2019, we continued to see strong growth in companion animals being driven by our parasiticides, key dermatology products and diagnostics. In livestock, our revenue growth in poultry was offset this year by U.S. cattle market headwinds and the impact of African Swine Fever in China. And while we're mindful of the industry headwinds, we remain confident in the health of our livestock business based on long-term industry fundamentals and opportunities to capture growth through innovation and integration across our offerings. Looking ahead, I am confident that the investments we've been making in our innovation pipeline, our global field force, manufacturing and R&D organization will continue to support sustainable growth for Zoetis. At the same time, we've been delivering on our goal of growing adjusted net income faster than revenues through operational discipline and maintaining strong margins. Key drivers of this performance include strong revenue momentum with a favorable shift toward higher-margin products as well as disciplined pricing and some foreign exchange favorability, which drove gross margin improvements. We've also maintained disciplined operating expense management and an efficiency focus in areas such as our supply chain optimization program. We believe that investments across our focus areas, including field force expansion, manufacturing and IT infrastructure and anticipated new product launches will be accretive to our margins long term as we phase out some of the upfront costs. Our strong financial results have historically allowed to make important investments for growth while returning excess capital to our shareholders. In 2019, with our R&D, capital expenditure and business development, we invested approximately $1.1 billion internally and externally to support our future growth. We also paid $315 million in dividends and bought back around $625 million in shares in the year. In total, we returned $940 million in cash to shareholders through buybacks and dividends in 2019. And demonstrating our commitment to capital returns to shareholders, this past December, we announced a 22% dividend increase. Looking ahead, our long-term value proposition for shareholders remains focused on 4 key objectives: first, growing our revenue in line or faster than the market; second, continuing to grow our adjusted net income faster than revenue; third, targeting investment opportunities that are meaningful to customers and create value for shareholders; and fourth, returning excess capital to shareholders as we continue to invest in the business. Our long-term value proposition has been tied to the execution of our growth strategy. I'm committed to continuing with the strategy, and I want to stress 5 priorities for the next stage of Zoetis' journey. First, driving innovative growth. Innovation is in our DNA of Zoetis, and that will remain front and center to deliver next generation of products and life cycle innovations across the continuum of care. Second, enhancing our customer experience. Delighting our customers has been the key to our success, but we will strive to do even better. In today's world, that means becoming more connected with our customers, making it easier to do business with us and delivering more compelling and personalized experiences for them. We want to integrate our products and solutions in a way that truly benefits our customers. Third, leading in digital and data analytics. By developing new digital products or enhancing existing products through digitally connected solutions, we can create more personalized, relevant and consistent experiences for our customers and drive increased operational efficiencies. Four, to continue to cultivate a high performing organization. Our past and future success is driven by our phenomenal team of talented colleagues around the world. And I'm committed to Zoetis continuing to be a company our colleagues can be proud of, and to attract, retain and develop the best talent in the industry. Finally, to champion a healthier and more sustainable future. As the world's leading animal health company, the work we do every day makes a meaningful difference in society by keeping animals healthy by fighting emerging infectious diseases that threaten our food supply and by supporting livestock producers in the veterinary profession, by taking further steps in promoting a safe and sustainable global food supply, increasing access to animal care around the world and taking actions to protect the environment, we can do even more. Bottom line, Zoetis is well positioned with industry's most diverse portfolio and integrated solutions across the continuum of care. We work hard every day to be the partner of choice for our customers around the world, and we are strategically investing to ensure that we remain the leader in animal health. I'm incredibly confident in our future. And I'm excited to be leading Zoetis into the next stage of growth. Glenn and I look forward to taking your questions across the hall. Thank you.

Okay. Great. So we're ready to kick off the Zoetis breakout session here. I was just going to open with a few questions, then we'll bring it up to the audience to follow-up from there. I guess my first question was kind of a bigger picture R&D productivity, R&D approach question. I guess when I look at the industry or your -- the last few years, we've had APOQUEL, CYTOPOINT, Trio, we've got the pain portfolio. It seems like on the campaign side of the business, you've delivered kind of blockbuster after blockbuster and seemingly are just pulling away from peers. What do you think has enabled that ability to deliver these products. Is this something -- it's just been a stroke of good luck? Or is there -- do you think there's something systematic about the way you're approaching R&D and product development that's enabling that type of performance?

Yes, I -- this is Kristin Peck. I think it is a systematic approach, I don't think it's just luck. It's -- I think we have a very strong organization, but I think as Juan Ramon talked about many times before, it's about the interconnected capabilities. It's about having the right insights from our commercial group as to what customers need, creating really strong product profiles and then an incredibly strong organization, developing products to meet those product profiles and partnering with manufacturing and supply early to make sure we can bring those products to market and scale them. And I think it's been clearly the innovation, but so much of that is the partnership across those 3 groups, across the company to bring those to life.

And do you see that something that your competitors are struggling with? Or is this something you've kind of led the charge? As of interest, do you think it's a sustainable competitive advantage? Or could we see some of your peers catch up in terms of that approach?

I do believe it's a sustainable competitive advantage. I mean we've done it consistently over the last 7 years as the chart I was showing earlier, with the market growing to 4% to 6%, we've continued to grow at around 8% every year. And the incremental difference really is innovation. And it's been different products in different therapeutic areas, so I don't think it's just one space. We had lots of innovation in livestock in our first few years. It's definitely been a year of a lot more innovation in the last few years in our companion animal portfolio. But we remain confident that livestock will have continued innovation, and there may be a little few years where it's not been where we want it to be, but we're very confident based on our investments, that it will continue to the same 4% to 6% growth in the medium to long term.

And I would -- it's actually just a follow-up on that. It's one of the questions I've been getting is this dynamic of when can we see 4% to 6% growth for the livestock space? So can you just elaborate a little bit, what you think needs to happen to get the market back to that type of growth?

Yes. So to get -- this is Glenn David. To get the market back to that kind of growth, we need to see similar innovation in livestock that we've seen in companion animal. So as we look to the next couple of years, where we still see a gap in innovation, we'll probably see slower growth in livestock than we'll see in the overall companion animal business. But when we start to look 2 to 5 years down the road, knowing some of the innovation that we intend to bring to market as well as other from competition, we do expect livestock to grow.

Okay. Great. And that growth -- is that at industry level? Or is that more Zoetis level, do you think?

Probably a little bit of both, but in the industry we'd like to accelerate in growth. Again, there are cycles of innovation. We've seen a strong cycle of innovation in companion animal. We expect to see that in livestock as well.

Okay. And another one, just to jump around a little bit. You -- one of your targeted goals was to deliver bottom line growth above top line. Should we consider that a goal as kind of each and every year that we should expect that? Or when we go through an investment cycle or a launch cycle like we're seeing in the next few years, could we see that moderate a bit in that window?

Yes. So it is a goal that we see over time. We've been very fortunate in our history that we've been able to deliver income growth every year faster than the revenue. We wouldn't see that changing in 2020 either, but it is a goal that we have over time. So as we look into 2020, with a lot of the innovation that we expect to bring to the marketplace. We would expect another strong year of revenue growth. From a cost of goods perspective, we do have some challenges with foreign exchange. We had very favorable foreign exchange in 2019. That won't repeat into 2020. And it's also another year of investment, as you referenced, right? We need to make sure that we appropriately support Simparica Trio, that we prepare the market for the monoclonal antibodies for pain that we expect to come to the market in 2021 and also the investments that we have in reference labs. Some of those investments will be dilutive to our overall earnings. But even with all those investments that we make, we would expect 2020 to still grow income faster than revenue.

Okay. Great. Why don't I open it up -- there's a lot of different topics we can go to -- why don't we open it to the audience here to see what's out there.

[indiscernible] you talked about the companion animal [indiscernible] in your presentation, you mentioned diagnostics, you mentioned biodevices. But could you be a little more granular or flesh out where do you see the growth coming from? RIMADYL you said was how many years old?

Sure. So I'll repeat the question for those on the webcast. He's asking specifically as you look at the growth opportunities in the companion animal space, where do we see the greatest opportunities. I would say, the greatest opportunity, by far, is getting our fair share of parasiticides. Parasiticides globally is a $4 billion market, with about $2.5 billion in the U.S. and about $1.5 billion outside the U.S., and we've been underrepresented historically in that space. We were third to market with Simparica. We've been very excited at the innovation we've already delivered in 2019 with the launch of ProHeart 12 in the U.S., with the launch of Revolution Plus, which was a life cycle innovation, but a really significant one and moving customers to that innovation. We're very excited as we look into 2020 for the launch of Simparica Trio in EU in Q1. And as we've recently mentioned, we just recently completed the technical section of the Simparica Trio package for the U.S. and are currently in the administrative review. And we do expect, and we're more confident in approval in Q1 and to launch shortly thereafter. And that being the single largest space in companion animal is a major opportunity for us. But as we look beyond that, we continue to believe growth in diagnostics, really building and accelerating globally, our Zoetis diagnostics portfolio, expanding that portfolio into a reference lab. Diagnostics is a very attractive space. It's growing at 10%, whereas the traditional markets we used to be in are only 4% to 6%. So meeting or beating that market growth means significant growth overall in our companion animal. And then as we look at the innovations that we've spoken about around monoclonal antibodies for osteoarthritis in both dogs and cats. There's opportunities there. But I think we talk a lot about these blockbuster big opportunities. As you look at our core portfolio, it's lots of life cycle innovation. So as I talked about before, looking at formulations, additional indications, expanding into new markets. I think we've got a lot of drivers of really driving the core portfolio as well as launching new products, and the largest of which continues to be growing in parasiticides.

You nicely explained the drivers for your business. But how do you factor and assess -- more recently it felt like accelerating trend to less protein consumptions also in the context of the whole climate change?

Sure. It's a very hot topic. And as you look at lab-based meats and alternative proteins. It's growing very quickly. I think what's important to understand is that global animal-based protein consumption continues to grow at 1% to 2%. And that's being driven by a growing middle class in emerging markets as well as just total population growth. Growing from 7.7 billion people to 9.7 billion people, there's a growing need. And what we're committed to, is partnering with vets and producers to really develop more sustainable ways of raising animal-based proteins. And I think there's exciting opportunities both with precision livestock farming, which is individual animal care to make sure we're losing -- using fewer resources and the right resources as well as developing new alternatives to antibiotics. So it's a strong focus for Zoetis overall. And I think overall, the reality is animal-based protein continues to grow even with the growth in alternative proteins.

On livestock side, can something like generic medicine be interesting for Zoetis?

So the question was on the livestock side can something like generic medicine be interesting to Zoetis. So as we look at the overall livestock portfolio, there are many areas that we're focused on. Our focus is on bringing innovation into the market. But to the extent that there is a significant opportunity, similar to what we did with ractopamine in the past in coming out with a generic, it was something that we would consider. But our real focus is on innovation.

So also for the livestock portfolio you have a biodevice for in ovo vaccine injection and I think you talked about potentially making the vaccine as well for that indication. Can you talk a bit about the size of that market? And the pipeline that you're thinking is potentially bring your own vaccines to the market there?

Sure. So the question for those on the webcast was, with regards to in poultry, we have a leading position in biodevices and what are we -- when do we think we'll have enough vector vaccines to put to those biodevices and grow that. So we are excited, as I mentioned in the general session, about the launch of Procerta HVT-ND and then to build on that. So that is a single. We're looking to grow that portfolio of vectors, both the number of them as well as the geographies. The U.S., we have a significant share in the biodevices, but we haven't had a share of the vaccines that went through them. So we do see significant opportunities to expand the number of buyer devices globally outside the U.S. as well as when -- as we do that, put our own vaccines through there. So I think you'll see a regular cadence of launches here over the next few years and building that portfolio. Poultry, we've been growing quite well, as you've probably seen, it's one of our fastest-growing livestock species, and we've done incredibly well in the U.S., and it continues to grow above market. Do you have anything?

Can I just ask about Trio, just the timing of the launch, say, kind of later Q1, what are the implications of, I guess, launching a little bit later in the season as you think about hitting the ground running and being able to take share quickly given the head start you have to market?

Sure. The -- you heard the question. So the focus of Trio is -- we'll be launching at the end of Q1. The main season for parasiticides in the U.S. or in the Northern Hemisphere is really Q2 and Q3. So our focus is hitting the ground running as quickly as we can. As many people know in the U.S., the big conferences are VMX and Western, where we will not have the product -- we're not expecting the product approved before those. But our customers are well aware that this product is coming. There's a lot of excitement about the opportunity for a triple combination product and that that's a game changer. So I think our customers are just waiting for that and for us to get it in the market. So we'll be working -- we expanded our field force in the U.S. last year to be ready to launch. That's both based in the physical touch points as well as inside sales and digital. We'll also be increasingly investing in direct-to-consumer advertising to make sure that pet owners are aware of the significant innovation and go to their vet clinics asking for the innovation as well. So we look to accelerate through Q2 and Q3. And given the timing, we -- that is why we provided the guidance of the $150 million to give people a sense of what we were expecting based on the timing of that launch.

A micro question. You mentioned in the presentation the impact the African Swine flu in China. How long the flu will [indiscernible] do you think that will be? Or is it of very limited time frame?

Yes. So the question was around the impact of African Swine Fever and if we see that as a long-term issue or more of a short-term issue. So for 2019 to Zoetis, we saw the impact of African Swine Fever add revenue of about $50 million. We expect that to neutralize as we move into 2020. So we don't expect a negative impact from African Swine Fever in 2020. What we do anticipate over time that within China, we'll continue to see the herd rebuild and probably to more larger producers that are bigger users of our products. So that should be a benefit over time. We also anticipate that other protein sources will need to make up for the lack of pork that will be available in China in 2020. In 2019, a lot of demand was fulfilled by frozen meat, but that is being used up. So really now, it's going to need to go to other protein sources. And because of the diverse nature of our business, we're able to fulfill those needs.

Can I ask you something on price within the portfolio. How big of a factor do you see price playing over time? You mentioned some of those protein kind of dynamics. And how should we think about that?

Yes. So we've typically, historically seen a 2% to 3% price increase, anywhere ranging from 2% to 3% over time. We don't see that changing as we look to the short term and the medium or long term. So we expect to continue to be able to generate 2% to 3% price.

And coming back on Trio, what it was your data suggests in terms of the kind of undertreatment or underutilization of parasiticides within pets? And how big of an opportunity is that in terms of market expansion as we think about a single offering, like we're -- you're going to have?

Sure. We think it's a significant opportunity. As you look at what the current compliances on flea and ticks, it's 4% to 6% and maybe closer to 6% on heartworm. But if you could have one single product and you're getting compliance on both for -- even both for 6%, that's already a significant opportunity. As you look at heartworm, it a deadly disease. The reality is animals should be on that no question for 12 months. They should -- all should be in 12 months for flea and tick. Fleas don't generally take a vacation in the winter. I think some people like, well, if I don't remember, I can just treat. That's not true with heartworm. So we think there's a significant opportunity to increase compliance of just even getting someone to using both for the 6 months and then expanding that and partnering with vets and with other companies, to look at compliance, some of the alternative channels and home delivery, offer unique opportunities to really increase compliance in the space overall. And I think by putting it in one product, you make it easier for the customer to do it. So we think there's a significant opportunity to increase compliance by using -- customers making sure they've got coverage of all 3 and then increasing the total number of months that they're using the product. So by making it easier, we think that is a big opportunity for us.

In terms of the share -- the opportunity to gain share, do you see this largely taking share within the existing oral category? Is it just -- take share from everywhere. I'm just trying to get a sense of kind of oral versus topical versus collar as where do you see an opportunity or the biggest opportunity?

I think it's going to take share across. So I think right now, people who might have only been buying OTC, but they had to buy multiple products. When they go to the vet next time, the vets going to raise, by the way, did you know there's an opportunity to only take one pill? So we think it's going to take a little bit from each. We think it's a unique opportunity that hasn't been offered in the market. And as you look at the top unmet medical needs that vets have been speaking about and the biggest frustration for pet owners, it's like which day do I give, which -- I mean it's just complicated and makes their life hard. So I think there's a real opportunity to take from different parts of the market overall.

On digital data analytics and the precision livestock side, how much of a real business do you expect that to be in terms of the ability to monetize over the next several years? Or is this more about creating greater stickiness with that [indiscernible] animal [indiscernible]?

Sure. This is a revenue-generating business. We are selling it. There's different business models in different geographies that we do. So some will pay the upfront implementation costs and then a small per animal. Some will just pay per animal and amortize that across -- it is a very steady product. That is for sure. It is revenue generating. We already are in the market and have a significant commercial business in international. We are new to the U.S. It's a very different business in the U.S. with much larger farms. So the digital data needs the servers, et cetera, are a little more complex in the U.S., but we think this is a significant revenue-generating business. We think it's going to scale slowly and then ramp quickly. Because once you have the installed base, it's pretty sticky. No one's going to want to reimplement a system and there's well points, every animals tagged, it integrates into your systems. Once you implement something, it scales slowly, but once you get there, it ramps quickly. And it's very sticky. No one's -- once you pick a solution to work with your herd and integrate it into all of your operating systems, it is very sticky. We think this is the future of where consumers want to go, individualized animal care. We also think it's where vets and producers want. It's the best care for each animal. It also addresses some of the labor challenges they have by being able to better identify an animal sooner that needs treatment, not as dependent on labor that may or may not detect the animal that's sick. And ours also has localization. So we can tell you exactly where that animal is. So it really does have a unique value proposition that customers are willing to pay for. And once we install the system, we'll be very sticky.

Can I just -- on just CYTOPOINT and APOQUEL, ex U.S., some of your larger markets, just where are we in terms of the penetration there? And how much more runway do we have for growth in that part of the business?

Yes. So we think there's significant growth in the international markets for both APOQUEL and CYTOPOINT. When you look at international versus U.S., the number of medicalized dogs is pretty much the same. The number of itchy dogs is pretty much the same. Yet, when you look at the level of revenue between U.S. and international, we're significantly weighted towards the U.S. And the main reason for that is we're able to do direct-to-consumer advertising within the U.S. to raise disease awareness. So outside of the U.S. in the majority of the markets, you cannot do direct-to-consumer advertising. So it's a little bit of a slower build using our field force. But we believe, over time, we will get to similar levels of penetration and share in the international markets that we do have in the U.S. We do think there's significant opportunity internationally. We also think there's continued opportunity for growth within the U.S., by continuing to expand the market and also drive incremental volume and price.

What are you views about generic dispensing rates within animal health longer term? And how does that sort of play for your generic business? Do you see those rates kind of going higher over time necessitating the need for a more direct to consumer engagement or do you think they're going to have the same [indiscernible]

Sure. I think one of the main differences between animal health and human health is we sell direct to our customers. There's no third-party payer. And maybe an interesting proxy would be almost like consumer health, you still buy Advil and Tylenol. And the reason is the brands matter. We invest in helping support those customers, and we invest in life cycle innovation. So many people are saying, wow, you're going to see the loss of exclusivity on Revolution. But then we launched Revolution Plus, we migrated most of our customers there. So continuing to invest in life cycle innovation where there's a greater opportunity in animal health than in human health to do that. You can get additional indications, you can improve a formulation, you can make it chewable, you can do lots of things that allow customers to get excited, and they're willing to pay for that, either -- maybe it's to maintain price in the face of competition, maybe it allows you to increase price. But if you look at our history, I don't think the future is going to be that much different. You still have to be able to reach our customers with a direct field force because that is the industry that we're in. So in animal health, generally, you lose between 20% and 40% over time. So over a few years. And our ability to make it less than -- or closer to 20% or closer to 40%, has to do with the level of life cycle innovation we continue to put against those products as well as the strength of our total portfolio. Your total sales with us help you get better pricing across our portfolio. So we think we have multiple ways of continuing over time to ensure, through life cycle innovation, other mechanisms, that it's about a 20% to 40% hit over a number of years.

Can you help frame the opportunity for pain as we think about that portfolio launching over the next few years?

Yes. So when you look at the overall pain market, really the only market that exists today was within dogs. I mean you look at that market, it's about a $400 million market globally. However, we think by bringing significant innovation into the market, we could expand that market. So we see significant potential for pain within dogs. With the feline, there is no existing marketplace. We know that there's less medicalized cats, so we'd expect the overall market to be somewhat smaller than dogs. But again, we have experience building markets. If you go back a number of years and look at the derm market, it's nowhere near the size that it is today. So we do believe bringing significant innovation into those markets will grow them significantly.

Okay. Great. Just another one on the, I guess, the innovation side. You mentioned the acceleration earlier of livestock. What are you -- is there anything you're particularly excited about or focused on in terms of where we can bring innovation into the livestock part of the market?

Sure. There's a few areas. The first is a precision livestock farming, which I think we've talked a lot about today. Second would be moving diagnostics into livestock, so more chute side, barn side diagnostics, we see as a significant opportunity. We also see an opportunity to take some of the technologies that we've been leveraging in companion animal and applying them there around monoclonal antibodies, protein and immunotherapeutics, moving that into the space as well. And that's why we've announced some of the recent collaborations such as with Colorado State to look at alternatives to antibiotics, some immunotherapies. So we see a number of these key modalities as being significant growth drivers across livestock.

A question?

Yes. The path to market has changed faster than probably most people expected. If you go back a couple of years ago, what do you think you would have done different to kind of anticipate and get ahead of that now?

So I think the question is around the path to market on the companion animal side, and I assume you're talking about the alternate channels and how those have evolved over time?

Sure. So as you look at the alternative channels, everyone was sort of expecting it to move a while ago, and it was slow, and then it was very, very fast. And to be honest, I think it moved faster than most people expected. It was important to us since 90-plus percent of what we sell requires a prescription that we be close to the vet as we made that transition. The reality is the vet that knows the pet owner has now decided that it wants to be able to buy their product from multiple channels. And so our focus, as we looked into 2019, was to be ensuring the pet owner could get that product, but that we also maintain protection for the vet. For us at Zoetis, since we weren't historically selling to some of those channels, they were buying our product in the gray market and selling it at cost, which was making our vets pretty angry. I'm not sure moving faster, it would have been good for us with vets. The vets have punished those that moved to the OTC channel too soon, as you probably know. Once we made the decision, it does -- it did take a little while to cut an agreement with every major online retailer and a retailer like Walmart, et cetera. So that did take some time, but we're very pleased with the implementation of our minimum advertised price policy in the U.S. We currently are selling to all online channels as well as to box retailers and retail channels. So I think it's going as we expected. And right now, it still remains a pretty small portion of our business, to be honest. So as you look at what we sell in companion animal, 60% of our portfolio will always remain with the vet. It's injectables, it's vaccines, it's surgical, it's acute. So 40% could move. Currently, those channels, for most major companies, are still pretty small. But it's accelerating very quickly. And so building a capability and doing that well has been a big focus of ours over the last year, investing in people with strong expertise in the retail channel has been something we've invested a lot in over the last few months.

I think we're out of time. I appreciate the time today. Thank you.

Thank you.

Thank you.