Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

Great. Thanks, guys. Good afternoon. Jon Block with Stifel, and we're going to continue down the animal health track. Just had a really good fireside chat with a couple of the physicians on diagnostics, and then we'll end the day talking to those same physicians on therapeutics. But right now, I'm really happy to introduce Kristin Peck, Chief Executive Officer of Zoetis, the world's #1 animal health company. I was just talking to Kristin and saying, we've got a robust talk track ahead of us. So I'm going to get right into things.

I'm actually going to start on the livestock side of the business, poultry, swine and cattle. And I want to revisit some of the commentary, Kristin, on the most recent earnings call, specific for swine. You've been posting really solid results over the past couple of quarters. For me, it seemed like Zoetis' management was a little bit more upbeat on swine going forward on your tall track versus maybe another large player in the space. So if you can talk to what Zoetis is seeing in a swine market. Why more upbeat, if I have that correct? Is it a function of new products or market share? And we can kick things off there, please.

Sure. We did have a strong Q1. Overall livestock, as you know, grew 8%. And one of the real leaders there was certainly our swine business. Really, what we think is underlying that swine growth is China. China is looking to rebuild its herd, but that will take multiple years, and they're still seeing intermittent outbreaks, as you probably know, of ASF. So really, it's other markets exporting to China that's driving the growth. So what's really holding up the U.S. market is not U.S. demand that has been in China. I just finished recently some market visits with our Brazil team, our Chile team, et cetera. And you're still seeing very strong demand for swine across the globe, and most of that's really going to China. So I do think the underlying story here is certainly growth in our portfolio in China. We saw a very strong Q1. As you probably saw in China, we grew 75%. That was led by our swine business. As they rebuild herds, it does favor multinationals with strong portfolios such as Zoetis. Certainly, we manufacture a number of our vaccines locally in China because biosecurity is really going to be important. So the growth is being led in China as they rebuild herds, but as well in other markets that export to China, that's really holding up that swine market from a global perspective.

It's helpful. And so when we hear about these like flare-ups in a particular region of China for ASF, to your point is maybe don't get too obsessed with some of those flare-ups because it's broader than that, right? It's going on -- with what's going on in China, but it's also the exports, and that's where Zoetis has a really strong market position?

Yes. No, I mean, obviously, we are concerned whenever you see these flare-ups. They have been localized, so it has not really -- thankfully. And really what's happened in China is there's more integrated producers with some higher biosecurity, I've -- still been able to produce. But all that does in certain ways is delay China's ability to rebuild its herd and support other markets at exports in China. The slower it takes China to do that. So until you can see China being able to get back to the same production levels that they had in 2018, I still think you're going to see incremental growth as people export in China looks to rebuild. So -- and I think multinationals with very efficacious vaccines are really going to be the winners in this as they rebuild herd.

Okay. Very helpful. I'll move from swine to poultry. And that division was really one of the standouts for Zoetis in 2018 and 2019. And it has moved to negative growth the past couple of quarters, and I just want to talk about the results that I understand it. Is it a functional market? Or I think you've also alluded to some low end competition, generic competition. So how do we think about poultry? And what that means for Zoetis looking forward?

Sure. I mean it's both a little bit. There's definitely significant -- there's a few things driving that. One, obviously, was COVID. It was quite difficult, as you saw last year. The one thing about poultry producers is they can pare down their flocks much faster than a swine or cattle producer. I mean, if they only takes 43 -- 60 days to grow a chicken, you can decide not to grow them, and if very quickly. And then you're going to rebuild. So you did see production overall go down. And they probably over rotated. Everyone's reading in the paper, there are chicken shortages in a number of places across the U.S., around the globe, I think they pivoted maybe more than they needed to. But I'd also say if you follow a lot of the food companies. Dine-out has come back faster than anyone expected. And you're starting to see a number of food shortages as supply chains try to pivot to be able to produce both dine-in and dine-out, it's slightly different supply chains, as you know. So I think some of the market will start to recover. Certainly, the signals are there for producers to expand their flocks and do that. And I think prices will come back, and that will obviously also encourage them to do so. And then you're also seeing certainly some increased competition for some of our leading anticoccidial products, such as Zoamix, new generics. We're expecting to hit the market this year. So we also, specific to us, saw a rotation. I mean, many people probably don't follow poultry, but you often rotate products to make sure you don't have resistance. So we did see a rotation of our products, which will rotate back as well. So there's a lot of confounding factors there. That was a little bit harder I know to parse down if you're following the industry.

Okay, that's very helpful. So the rotation off, arguably can go rotation back on. And like you said, maybe some of those producers with the flocks got overly aggressive and now with dine-in coming back stronger than people anticipated, arguably, that could be a net positive if you would lead in the state?

Yes. And the only negative is we are expecting generic competition for our leading product, Zoamix, one of our largest anticoccidials, which hasn't exactly happened, but people are expecting it, I will tell you, in the market as well.

Okay. And then help me with cattle. I mean, look, we used to do a livestock monthly. We plan on reinstituting that pretty shortly, but it just seems like mixed data points, right? Protein consumption slowly returning. But then you hear these input prices and what that may mean for something like a cattle person that we were playing around with for some period of time. So your thoughts on cattle going forward? Maybe tie that to dine-out returning as well?

Sure. There's been a lot of uncertainty, to your point. And there's a lot of mixed messages, I think, going on, and not to mention, little crises like we saw with JBS and their cyber breach. And all this stuff does is back up the market and confuse the market and confuse producers. But overall, before we entered the year, we were expecting a flat to declining overall herd size in the U.S. Now that may change. But again, back to as I said, it takes longer for cattlemen to rebuild their herd. I mean do the gestation period, et cetera. So they're slower to react and they're slower to react when it's coming and going. So there may be some signs certainly where prices are going, that they would want to rebuild. But really, what's holding that back is input cost. So if you're looking at just historic highs right now in the last -- at least over the last few years, since the 2014-2015 period in corn prices, which I think as you look at that, one of the biggest -- that's their biggest cost related to that and labor. So -- and by the way, labor is also pretty challenging, as you know as well, for most of our customers. So I do think that is going to continue. Although the signs on demand will increase, and you are seeing input costs go up and cost of meat go up. I still think whether or not they're profitable and whether or not they think they're going to be profitable in a year, we'll probably temper some of that enthusiasm of the increased demand of dine-out overall in the U.S. You're also just working through stocks, but that's market-to-market. But I think U.S. cattle, I think, will still be a little bit sluggish, and we're not expecting -- maybe low single-digit growth there, flat to low single-digit growth over the next year or so.

Specific to U.S. cattle in that last part, Kristin?

U.S. cattle on that one. Correct.

And while I've got you, let's just talk JBS. And I saw the news floating and I'm like okay, I got to ask the market leaders this question while I've got them. My thought was if that was a prolonged event from the cybersecurity, it starts to really play around with the food supply chain. I mean it seems like it's evolving, but maybe it's not as prolonged as what the initial concern was 48 hours ago. What does that news mean or not mean for the industry, in your opinion, as we sit here today?

Look, I think it's going to work its way out over the coming weeks. I will -- I agree with you, 48 hours ago, the story was quite different. When they first got hit, they took out a huge percentage of their capacity. They did a phenomenal job of trying to work to get that back. There could -- there's more space for them to have moved in pork, which they did. They definitely still had some challenges in poultry, which I think they seemed to address. The cattle part was harder for them. Just -- those are large animals moving them. There's really little excess capacity, honestly, at the packing plant perspective there. But from what we've heard in the last 24 hours, even, they've just gotten a lot more of their plants back online. And I think that will work its way out. It's just yet one more uncertainty to producers. They probably were not -- I mean, God, I mean, why the locusts are back too, I couldn't even say the locust. But there is definitely a little bit of your cattle producer wondering what else is going to fall, but I give JBS credit. They've recovered much faster and getting those those plants set up still produce faster than we expected at least.

Okay. Good. Good to hear. I'm going to shift gears and move over to companion animal therapeutics, and obviously, a lot to talk about there. And I'll start with atopic dermatitis. Maybe just to begin, what percent of U.S. practices are arguably using Apoquel and Cytopoint right now? Is this all about utilization gain from here? The product has been tremendous over the past products, handful of years, pretty much is everyone using it now in the U.S.? Or is there still a little bit more of a ways to go in terms of new adopters, if you would?

Sure. I mean, let me break it down in a few ways. So obviously, we saw a really strong quarter, a 24% growth in dermatology for us across Apoquel and Cytopoint. And I'll compare a little bit of U.S. and International, which are in slightly different spaces, I would say. As you look at the U.S., what's driving that growth. First is just more people adopting pets, more people staying at home with their pets, noticing their itch, going to the vet and more people prescribing it. So as you look at some of that growth, it was certainly an expansion of the category, which we continue to look to do. We're investing significantly in direct-to-consumer advertising to raise awareness, if you have an itchy dog, there is a product for you. Go to your vet. Some of that's branded, most of it is now, but sometimes it's unbranded for us. And people being home noticing and I think that's really what's growing it. Look, there is still in the U.S. alone, 6 million dogs that have atopic dermatitis that are not treated today. So I still think there's growth there. Almost every clinic in the U.S. has access and is currently using Apoquel, but we still think there's growth in getting it as a more of a first-line treatment. So why not as soon as that pet comes in, we should be the first thing they turn to. We're gaining share against steroids, which still get used often in a first visit, see if that can just address it. So I think there's more we can do there. But I'm also super excited about the opportunity outside the U.S., where our -- as you look at -- those dogs treated, et cetera, and our penetration where it's still less, and we're looking to be creative around raising disease awareness since some of these markets outside the U.S., we cannot do direct-to-consumer advertising. But we can raise disease awareness, which we -- there are products for some of these diseases, which we'll continue to do. And then to leverage direct-to-consumer in the markets where we're able to. I still think outside the U.S., we still have a significant opportunity to continue to grow that product. And as you know, we're looking this year for our dermatology portfolio to be at least $1 billion in sales, which would be a first for us.

Yes. And maybe to push you a little bit on the International opportunity. So I'm looking at some of my numbers. I think internationally, atopic derm was huge in the quarter. It was up over 50%. That can sometimes be a little bit lumpy, but do you think atopic derm has a better opportunity to go cross borders, if you would? Like a lot of times, some of the innovation as much more pronounced the uptake here in the U.S. from a pet owners perspective. But do you think atopic derm is something where if we're able to get out to the consumer, you can actually see greater uptake or utilization of that portfolio in some of these OUS markets?

I think it is. And I'll tell you why. The reason is it's symptomatic. If you -- anyone who's listening who has a dog, who has had atopic dermitis knows it. The licking, the scratching, the lick -- I mean and it keeps you up at night. So there is -- if you know there's a product and your dog is doing it. It's not like flea ticks where until they get a tick, maybe I don't know for a while, it's not necessarily symptomatic, it's preventative. Wellness products are sometimes hard from that perspective. But when you have something so symptomatic, I really do believe there's a significant opportunity to raise awareness with pet owners and clinics that this can be treated. There is a treatment, ask pet owners about it. So we do think that that's a significant opportunity. And we're trying to just be more creative. And really, as we talk with our local management, what are those opportunities to get markets outside the U.S. to adopt some of these new technologies a little faster.

Okay. Great. I want to continue going more down the atopic derm road. I think you guys talked about eventual competition, it's probably not going to be there until at least the back half of 2022. Your thoughts on a veterinarian's willingness or pet owners willingness to take their dog off their responder for a solution that's 10% or 15% or 20% cheaper? And where I'm going with this question is, I think it's something different than like a preventative, right? If there's a preventative for flea and tick, it's a preventive at the end of the day, and maybe you have an appetite for a cheaper solution as a pet owner, but it's symptomatic. Well, you just said. I mean, I see my dog itching scratching, and I put them on and this thing works. Do I want to mess around for 10% or 20%? So your thoughts -- I mean, first of all, competition doesn't get there, and it's likely they're not there for at least another year. But even when it gets there, do you see their ability to really take dogs already on a Zoetis solution, whether that's Apoquel or Cytopoint and move them to product X.? I'd love to get your thoughts on that.

Yes. So I mean, look, I think if your dog is on a product, it's working great, you're not going to be that motivated to switch it. Certainly, if it used to be awful and now it's working really, really well, I don't think you're as motivated. I mean, look, there are some extremely price-conscious customers that I'm sure would. I mean, that's not to say nobody would. I think their opportunity will be to go after the newly diagnose as a much easier lower hanging fruit. But look, we're really focused on building loyalty to Zoetis and building loyalty specifically to the Apoquel brand, making that part of Zoetis Petcare Rewards has also been an uplift for that brand as well. So you register that and the more products you buy from us, you get cash back to spend at your vet. We're really focused on continuing to build the loyalty to our brands and to Zoetis across our portfolio, not just at the vet level, but with the pet owners. So we obviously know this is coming. I mean we're surprised as many of you are that we haven't seen competition for Apoquel or Cytopoint before. Our knowledge of exactly when someone enters is not perfect. Our latest intelligence is we don't think for the second half of next year, we'll see. But we're ready. I mean we've been ready for a while for that to come, and we'll be aggressive at defending the value that our product provides, the efficacy, the safety, the data behind it, et cetera.

And do you know of that competition, if and when it comes, is that more likely small molecule or large molecule? Like that potential competitor in 2H '22? Do you know which one it would be if it's anyone at all?