Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

All right. Good afternoon, everyone, and welcome back to the William Blair Growth Stock conference. Our next session is Zoetis. I'm John Kreger, the analyst that covers Zoetis at Blair. Just a quick bit of housekeeping, if you want to check out our conflicts or other disclosures, please see our website at williamblair.com. With us today from Zoetis is Glenn David. Glenn, thanks for joining us.

Great to be here. Thank you.

Most of you know Glenn from his extended time as the company's CFO, but he's, I think, what, day 2 into a new role?

Yes.

So congrats on that.

Thank you.

So we'll spend the next 30 minutes in a fireside chat format. Anyone that's listening, if you've got a specific question that you want to ask, just please put it in the chat, and I will do my best to work it in.

So let's get started. Glenn, I think let's just hit that one that I just mentioned. New role, again, congrats. Can you bring us up-to-date on a, what your new role will be? And what -- if you're contemplating any sort of structural differences as what maybe steps into your old role in the CFO seat?

Yes. Thanks, John. As you mentioned, it's my second day on the job and really excited to be stepping into the new role. So in the new role, I have responsibility for our international operations as well as our PHARMAQ business, our biodevice business and our Pumpkin Insurance business. The one thing structurally that's changed a little bit in the international operations is I'll have a direct responsibility for China and Brazil with the general managers for those markets reporting directly to me. And we'll have an international president as well that's responsible for the rest of the international markets. So really excited to be stepping into this role right now. We have significant growth drivers internationally. As we've talked about, China is growing incredibly rapidly, for us with plus 75% growth in the first quarter. Brazil also growing very rapidly with 48% growth. And both of those markets, I think many people initially think of those markets as livestock markets, but they're also both very strong from a companion animal perspective and growing very rapidly in companion animal as well. And then across the rest of the international markets, a lot of strong growth drivers moving ahead with the recent launches of our monoclonal antibodies for pain, Librela and Solensia in the EU, continued growth from our Simparica franchise, our dermatology franchise as well as our diagnostic portfolio. So really excited about the opportunities internationally. And then the other areas as well, PHARMAQ, our aquaculture business with fish being one of the fastest-growing species. And we expect that to continue for a number of years as well as the other areas of insurance and biodevices as well. So really excited to be stepping into the new role. And also very excited to welcome Wetteny to Zoetis. Very excited to have him joining the organization, and I'll be working closely with Wetteny to ensure a seamless transition, and I think he'll bring great external views and insights with his experience as a public company CFO of a very successful company as well. So really excited to having Wetteny join.

Yes. We know him well from his days at Catalent.

Yes.

Great addition for you guys. Okay. I wanted to hit the JBS hack a little bit. I know -- I remember in the early days of Zoetis as an independent company, when you get these extraneous events, it would really spook people. So can you maybe just step back and tell us what, if any, impact, a supply chain shock like this has on your business?

Yes. So obviously, JBS is an important and valued customer, but we don't expect any material impact to our business from this hack. Obviously, we expect them to recover relatively quickly. And also, as we've always emphasized, the diversity of our business from a species perspective, from a geographic perspective, but also from a customer perspective, really allows us to absorb any short term impact in one particular area and make it up in another as the demand and need for protein will continue. But again, we don't expect a material impact at all from this hack.

Okay, great. Maybe more generally, again, thinking back to the early days of the pandemic, there were sort of meat packing throughput issues that impacted the livestock part of your business. Are those totally behind you at this point? Or are there still some lingering effects that you're seeing?

Yes. So there were 2 impacts that we saw initially to our livestock business from COVID-19. One was related to what you're referencing in terms of the shutdown of some plants as workers may have been coming down with COVID and some of the safety protocols that were adjusted for that. That, we believe, obviously, the livestock producers have recovered well from interoperating virtually at full capacity. So we do believe that, that is behind us. The other impact was related to the transition from servicing food services, cafeterias, restaurants to serving grocery stores, which created more of a short-term impact as well. And they recovered in terms of the adoption of their producing methods to accommodate grocery store cuts and things of that nature. That will continue as things open and food services becomes a bigger portion of the businesses again. So we're still working through that. But our customers overall have adapted very well.

Great. Okay. Let's turn back to Librela and Solensia again in your new role. Can you remind us where those 2 products are in terms of where they've been launched and any sort of early feedback on how it's going?

Yes. So we begun the early experience program for Librela in Q1 and with a full market launch in Q2, and the feedback from the early experience program has been very positive with both pet owners and the pet seeing a significant improvement in the quality of their lives. And also the feedback from veterinary professionals has also been very positive, and the feedback really gives us even greater confidence in the ability of these products to reach blockbuster status which in animal health is over $100 million. So next year, we're beginning an early experience program in the EU and then expect a full launch in a couple of months after that. But again, the initial response has been very positive, but a little earlier on in the early experience program there in the EU. As we mentioned on the Q1 call in terms of -- I know there's a lot of interest in U.S. approval. We do expect U.S. approval for these products in 2022 with Librela probably coming more in the second half of the year and very excited about the potential for these products globally. And the new treatment option, they'll be bringing to pain for osteoarthritis, particularly in dogs, but also really serving a completely unmet medical need in cats as well.

Great. When you think about these 2 products 5 years from now, which one feels bigger and more impactful to you? Librela, given you're serving it's a larger animal or Solensia, given that there aren't as many therapeutic alternatives for cats?

So they're both very exciting opportunities. To your point, Librela is coming into an established market for dogs, which is about $400 million globally. However, that is served by much older technology in terms of NSAIDs and products like that. And we do think there's a significant opportunity to expand that market. So while it's an established market, by raising the standard of care, we're also going to price the products at a premium to -- obviously, a significant premium to the NSAID but also to -- of the branded competition, such as RIMADYL, we will price these products at a premium. So that will drive additional market growth and then also just raising awareness around the disease state with the potential that these products have, we will invest behind raising that awareness as well. So we think there is significant opportunity to take share in that existing market. But equally or even more importantly, to grow the market significantly for dogs. And then for cats, while it is a market that really no treatment option exists today, when you query veterinarians in terms of some of the biggest unmet needs in animal health, pain for cats is one of those biggest unmet needs. And we do think that Solensia will gain significant traction and again also be a blockbuster product in animal health. So they're both very exciting. While Librela will have competition, we think we are bringing new safe and effective medicine and innovation to the marketplace. And Solensia will be more focused on building a market where there is limited competition today.

Okay. And then one last one on these. What's the timing of the global rollout? You mentioned China, Brazil. Are there other key regions for you beyond the U.S. and EU?

Yes. So we'll expect to get additional approvals in the coming years. We currently have approval in the EU for Librela and Solensia. We have approval for Librela in Canada and Brazil. And we'll expect to get approval in additional markets in the coming months and years. As we typically do, there's different regulatory time frames across many markets, but we will look to roll out in other markets as those approvals come. And based on that and the global nature of these products, we do see significant potential for these products moving forward.

Great. Okay. Let's pivot to the companion animal market and sort of macro demand trends that you're seeing. So I think on the last call or 2, you guys have talked about kind of the elevated pet spending you've seen since the onset of the pandemic. Now that we're lapping it, what are you seeing? Do you expect those elevated pet level -- that spending level to continue or kind of come back down to a more normal historical pattern?

Yes, John, I think we'll see some fluctuations by quarter. As to your point, right, there were some fluctuations last year where the first 2 quarters were somewhat impacted by the impact of COVID. And then in the back half of 2020, we saw a significant growth in spend, which may create a challenging comparator in the second half of the year. But overall, we think the trends are very positive. What we saw historically pre-COVID was we generally see revenue per visit up 5% to 6%. Post-COVID, we saw that in more of the 10% to 13% range. So we expect that over time, it will normalize somewhere in between as we've seen increased adoptions, the increase of that pet owner to pet bond and increasing standards of care as well with us and many -- or some of our competitors bringing significant innovation to the marketplace as well. So we wouldn't expect it to remain at this 10% to 13% level, but we wouldn't expect it to revert back to the 5% to 6% level either. It probably be somewhere in between there as new innovation and increased use of diagnostics in other areas continues to drive spend per visit.

How about pet adoption and pet population numbers? I mean a perception that I hear a lot is there's just COVID puppies all over the place, but we've heard from other people that, that's not the way biology works. And it's very difficult for breeders to really get more pets out into the market even if they wanted to. Are you able -- do you have a sense about whether or not we have a kind of a sustainably higher number of pets out there? Or again, is this more I'm spending more on my dog because she's sitting right next to me all day long?

Yes. To your point, it's a number of different factors. A, you've heard in the news, and we've seen it in terms of shelters being empty and adoptions increasing from shelters, which is great to have those pets have a home and a family to be part of. But to your point, also breeders, obviously, there is a time frame in terms of which they can increase the availability of pets, right? And to your point, that doesn't happen overnight. But also that -- the pet owner bond and people spending more time with their pets and spending more on their pets. So we've seen a number of different factors drive that increased pet adoption and pet ownership, which we think has been benefiting the industry. And as I stepped into my new role in international, speaking with many of our country managers globally, while the data is somewhat limited in some of the markets, that trend, we definitely do believe is a global trend. And the other dynamic is not just new families having -- getting their first pet. It's also many families who already have a pet, expanding the number of pets in their family, which we also think helps contribute to the increased spend per visit as well. So we think there are very good dynamics for that overall in terms of pet ownership as well as spending per visit that will continue to drive additional growth in companion animal and be a strong underlying factor for us moving forward.

Okay. Great. Let's pivot to Trio. We've -- I've noticed the more commercials of late talking about the product. When Trio was coming to market, the thought was you were going to get more compliance. If you could sort of bundle those 2 product classes together, have you actually seen that? Have you seen sort of market expansion post-launch?

Yes. So we're certainly seeing a bit of market expansion post-launch. In terms of the compliance data, it's a little early on to really have true visibility. We've been on the market just about a year at this point. So we'll get additional data on that as we evolve. But we've seen really good adoption of Trio in the marketplace and a really positive response to Trio. When you look at the performance that we had for our Simparica franchise last year, generating over $400 million in sales, and we expect that to grow significantly this year. And we saw the franchise grow 130 -- over 130% in the first quarter and is really a tremendous job by our commercial team in -- across the globe to launch that product, particularly launching during the impact of the pandemic. And what we saw initially is we weren't able to achieve our penetration goals in Q2 and Q3, but we did see that catch-up at the end of the year. So we were able to actually exceed our goals for the year. But equally important is the share that we had in those clinics that adopted was beyond our expectations, and we see very strong reorder rates as well. So seeing very good trends for Trio. We do believe that it was an unmet need in the marketplace for the triple combination product, and we would expect over time that the clients around it will be beneficial as well.

What do you think your parasiticide market share is now compared to, let's say, 3 years ago?

It's significantly higher than it was 3 years ago. It's hard to get exact global data on that. But when you look at what we've been able to accomplish with the franchise, and we speak a lot about Simparica Trio, but it extends well beyond that. Obviously, the growth that we've continued to see in Simparica, which has been beyond our expectations, we did expect there to be cannibalization of Simparica. I mean we're seeing some of that in the U.S. but less than what we initially thought. But we're seeing significant growth of Simparica outside of the U.S. Then you take it to our ProHeart franchise with the introduction of ProHeart 12 and the continued growth that we experience there and then REVOLUTION, in our REVOLUTION PLUS franchise performing very well. There was initially some concern with REVOLUTION and generic competition, but we were able to transition significantly to REVOLUTION PLUS with our focus on life cycle enhancements really providing significant benefit for REVOLUTION PLUS and the overall franchise for parasiticides growing significantly over the last number of years and really poised for significant future growth as well.