Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

The Cowen conference. Representing the company is Wetteny Joseph. He's, of course, the Chief Financial Officer. So lots to cover, lots going on at Zoetis. Like any great company, there are lots of opportunities. Of course, like any great company, there are also some challenges. So I'd like just to start out and maybe get some of the challenges out of the way, and then we can move on to spend more time on the opportunities.

So when we look at 2023 and we look at 2024, there's kind of 3 or 4 things that are out there that a company such as Zoetis needs to navigate. And that includes friends and vet visits, potential for global recession, competition, geopolitical considerations. And then just any other factor. How do you think about each of those? And how do you go about putting them in your forecast?

Thanks for having us here, Steve, happy to address your question. And when I think about your list, trying to put it in terms of bookends. So on the one hand, competition. In this case, we're talking about Trio, for example. We've been expecting competition for quite some time. We've been preparing for it. We believe we're well positioned. This is a market that we expect to continue to expand with Trio being in a triple combination which is still relatively new in the concept of standard of care with our product launching in the middle of 2020, 3 years into a market segment that will continue to grow and we've seen oils grow quite a bit since they launched about 8 years ago. And we will expect that expansion to continue. So that's on the one end and clearly factored into our guidance, right? On the other end of the spectrum, output geopolitical tensions. Certainly, these are areas that we're monitoring we think about mitigation strategies around our supply chain and things of that nature. But it's hard to put a specific number into your guidance for what happens from a geopolitical standpoint. In between, we think about the macro. We think about a potential for recession, et cetera. And our industry, which has proven to be very resilient and has proven so across different market cycles. We've done surveys after surveys that continue to underscore the importance of pet care and the resiliency of our industry. And so we believe the industry remains very resilient, and we're well positioned with our portfolio, our diverse product slate, our global scale, our innovation grow above the market. We've shown that time and time again. And so we came into 2023, expecting a little bit more of a moderate growth environment because of those things, those factors. But still growing and us growing above the market. And so we factor that into what I'll call reasonably prudent elements that we put into our guidance to start the year. And then when I think about how will that sort of work itself in the year. We're watching vet visits. We're watching the labor constraints and how productivity is evolving across the channels. We're watching livestock in terms of the cattle market and things of that nature. Vet visits, for example, as you know, over the last few quarters, we've been down off of the peak levels they were in 2021. And probably the peak of the peak perhaps was Q4. And we've been watching and we're seeing that even in Q4, the absolute vet visit numbers, which you have to look at on a stacking quarter basis versus a [indiscernible]. They remain about 2% or so north of where they were in Q4 2019 before the pandemic. And very importantly, the revenue per visit and total revenue for clinics are up substantially since then. And so those are the things that we build will sustain, but the vet visits will come down from where they peaked in 2021. And as we start 2023, it's still early. So we don't want to jump to too many conclusions. Very encouraging to see some improvement versus where we were ending 2023, and we'll continue to watch those there. So those -- that's how I think about it in the context of the U.S.

Okay. I should have mentioned this at the outset. Should you have any questions during this session or would like to follow up any point. Just raise your hand and state your question, I'll repeat it. So let's go on to one of the specific factors in 2022. And the company has already said it's in the process of resolving these, but that was the supply challenges that you experienced in 2022. Where does the resolution of those stand? And do you expect the challenges are revolving around vaccines to persist even beyond the year we're now in?

Look, like most industries and other companies, we ran into certain supply constraints. And although playing themselves out throughout 2022, very early in the year, we were out with Trio on some of the channels. We had some challenges around Revolution, Revolution Plus and so on. But as we exited '23 and we said so on the third quarter earnings call, we felt that we had those issues largely resolved when you think about parasiticides and when you think about the top 3 or 4 areas that really drive our growth, parasiticide is the biggest market in animal health, about $6 billion and we've been getting a lot of traction there and our Trio product grew almost 60%, I think it was 58% last year. And so it was very important for us that we tackle those issues and get them solved, and we felt exiting '22 that we had that largely resolved. And certainly, you could see our ability to even run promotions late in 2022 with the supply recovery being enabled by that. So clearly, that's something that I would say is largely resolved. When we think about derm, we really didn't have any supply constraints there, right? Other than Cytopoint is an area that -- a product that has some level of preference. Now there are some indications that are more sort of relevant for Apoquel versus Cytopoint, but certainly, there's an appetite for veterinary practitioners to use Cytopoint and we've been somewhat constrained given some of the inputs going back a couple of years with COVID vaccines and so on that has limited our ability to take full advantage of that. And out of what to lift those constraints effectively and coming into 2023, being able to tackle demand there. And then our pain franchise, which we're launching across international segments already in Europe. We have a number of other markets that we're launching. Again, we feel very confident that we're able coming into 2020 to take full advantage of those and lift the allocations that we're on Europe, for example, on the paying products. And so when we made comments around vaccines just mostly on the livestock side, and by the way, it is not unique to Zoetis. This is something I would say is industry-wide because of the nature of these vaccines and then onto the Life product. It's less specific to capacity constrained, it's just you get a different product and you have to test it, et cetera. So you have some in that creates some issues around the industry. Again, not unique to Zoetis and factored into our expectations for 2023 and the guidance that we gave as well.

Moving down the P&L. I like some of the factors that went [Audio Gap].

Yes. Look, R&D area, we have a very disciplined and consistent in how we approach it year after year. And as we look at the programs in our pipeline early on in research or early development is a screen that we go across. And at the returns that we include the involvement commercial teams around market potentials and all those type of things. And then across our R&D organization. We look at the probabilities of as well as the technical hurdles that we have to get over is soon. The screen [indiscernible] let go into the pipeline dictate what the [indiscernible] around. We don't go into it and say, well, we want to increase the spend in R&D by end programs -- are we going to go launch cycle game, right? So you see us having an uptick, which we are in terms of and for 2023, it's roughly about 7.3 [indiscernible], but if you go back to 2019 [indiscernible] Is at [indiscernible] and if you look at it as development evenly, but it's the pipeline [indiscernible] and something [indiscernible] awesome.

And then moving on to CapEx. You guided to $1 billion in CapEx at the high end of the range. Mostly on monoclonal manufacturing. Does that cover current products? Or is that for some of the newer assets kind of coming out of the pipeline?

Yes. And when we look at CapEx, right? We guided to $950 million to $1 billion for 2023. We did $500 million in '21. We grew that quite fairly in 2022 in the mid-6s. And so that's a pretty significant increase there. And again, it's driven by our MAB platform, but not exclusively. We look at MABS, monoclonal antibodies as a platform. And it informs and have a number of products, whether you look at across the pain franchise, where we're continuing to grow in Europe as well as anticipating the approval for Librela in the U.S., both across [ dose Silencio ] and Librela. Driving those, I just spoke about Cytopoint as a monoclonal antibody being able to get the input that we need to drive through the demand of growth there. And of course, as a platform, we want to make sure we build out at least environment, if you will, to be able to add to the products make their way in from those peel, we have approval for Apoquel in Europe and in the U.S. So as are all solid, we're also making investments. And by the way, we're making investments to explore our R&D motivation as well. So [indiscernible] so non-MAB, if you will, all solid manufacturing investments we're making across the network as well.

And then lastly on -- the last thing on 2023 guidance is you have a generic penetration in both cattle and poultry as headwinds. How should we think about those factors throughout the year? And then when do you see those kind of normalizing in the long term?

Yes. When we look at generic competition, if you look at [indiscernible] for example, we're now -- this quarter, this first quarter of '23, we're lapping the full 2 years on Jackson. Now that's not to say that we won't see some more headwinds coming from it but not to the extent that we've seen in the first 2 years, we had about a 16%, [indiscernible] impact in the first year. We thought it would be closer to 20%. It's a little bit better than we anticipated. And then in the second year, it was about 25%. So a little bit worse than we thought 2 years out. So but it's still in the same ballpark of about 40%, if we go 40% to 50% impact on the product. So we're at a level now, particularly with Zoamix, but also to a large extent with [ Jackson ] where the impact won't be significant enough to move the needle for us. But we will also continue to see some impact here. By the way, we have maintained most of our volume share with respect to [ Jackson ] while significant price erosion there as we, again, anticipated. But we have, which the macrolides is a premium class here. [indiscernible] effectively, we have been able to maintain that partly because as prices came down, it -- they expanded use in terms of this premium class. There has driven some volume as well. But we have maintained leadership here, and we anticipate continuing to do so.

And then moving to some new products. Could you talk about the U.S. launch on solensia and kind of what feedback you're getting from vets? And then just in terms of expectations, do you still expect to hit blockbuster status in the first year of U.S. launch?

So when you look at solensia, there hasn't been innovation in terms of pain for cats. This is the first product. So it's been highly, highly anticipated. There's a ton of excitement on the part of veterinary practitioners for solensia. And we've seen that in terms of the penetration levels that we're seeing across the clinics. So very much, I would say, on, if not exceeding our expectations. But as we said all along, the cat pain market is going to take some time to develop, right? This isn't an established market. Cats are less pedicalised and it takes a lot more to get a cat into a clinic than bring a dog in. So for those reasons, we anticipated that usage is going to take some time. It will and other things behind it to drive pets into the clinic, but certainly from a veterinary practitioner's perspective, I can't imagine that they could be any more excited about this product. And so I would say, in terms of penetration levels, they're at or better than we anticipated. But overall, I would say there overall is about where we expected the product to be, and we'll continue to drive that as we go forward.

And then on the U.S. launch of Librela, what are the gating factors to that launch? And then you mentioned that you could see sales in 2023 that would not put of guidance. Do you have any updates on launch timing and how many months of sales we could see?

Look, we haven't gone out with particular months of sales in '23, but our expectations for Librela have been very consistent for a number of quarters now. The net difference in terms of our progress that we shared, I think it was at the conference in January was that we have now completed the inspections successfully outside the U.S., obviously on our way to getting the [indiscernible] but we don't control the entire project, but our -- having crossed that milestone we're very confident that in the first half of 2023. And given our experience developing a market is to use a product -- very important in you [indiscernible] getting them comfortable using the product factor, MAB, these are all new set of approaches relatively speaking and getting the product into their hands and getting the comfort is important to drive spare adoption once the product is launched. And so we intend to run an early experience program. After approval, there's a process to get the labels done, you don't have a label until you have an approval because that sells out the claims that you can have. So there'll be some time to do that. And then we'll go into an early experience program. And post that, we'll do a launch. And so that's why we said the launch would be late in 2023. And as you just said, we didn't factor U.S. Librela into our guidance. It's our normal practice. We're coming into 2023, while we're confident we'll see an approval, it has not been approved yet. And it will be a late launch in the year. And that combination is typically something we would not factor into the guidance. So as we get closer to it, we will provide some more color on that. But this is why we haven't said x number of months, et cetera, in terms of what revenue could potentially come into the year.

Can you elaborate a bit on the early experience program. Is this to select vets or all vets? And do you make revenue during that early experience program? Maybe you could talk a little bit about it.

Yes, typically, an early experience program is going to have select vet practices. You do try to get a good cross section, if you will, of practitioners in there. And typically, there is revenue, though not substantial. What you're looking to do is really get them comfortable using the product, understanding how long it takes to see a reaction and all those type of things. And based on those factors, you can start to -- and then by the way, they start to write and speak about the product, particularly the key opinion leaders, and that gets the general practitioners more comfortable understanding what to expect once they do have the product in their hands and then you launch.

Maybe just looking at the pain products overall, whether it be in the U.S. or Europe, what has surprised to let us most about the experience so far?

I wouldn't say that there's anything particularly, it is surprising. We anticipate the product would be -- would do well. It is innovation in an area, particularly when you think about efficacy and safety. The alternatives are steroids and [indiscernible], et cetera. And so we're coming into an area that we know from a standard of care perspective, unmet need that it would be impactful. Now quite frankly, the reaction from pet owners and vet practitioners, has been tremendous. And you saw certainly in 2022, right out of the gates, the product in Europe, really the uptick was the fastest we've seen. The product is already #1, that being Librela, #1 pain product in Europe already and the time on the products and the response that we've seen is just significant, which is why we went into allocation by the way, last year in 2022 and we're very pleased to be able to come off allocation in the third quarter of last year and coming into '23 being able to fully launch even some markets that we delayed launching last year. That we'll be launching starting and now we are already into the second quarter in international, close about a month ahead. And so we're already in the second quarter and this quarter and the next, we'll be launching across a number of markets, including Canada, Brazil, Japan and Australia.

Net debt positive reception has been echoed by the veterinary KOLs that we talk to, who are very excited about the product and can't wait to get it. So let's move on to Simparica Trio. So you already mentioned that you expect growth in the future. Where is that growth coming from? Is that from new pets, is that from switches, where do you see this growth coming from in the future?

Well, we've seen across parasiticides and as I mentioned earlier, pet care parasiticides about $6 billion market globally with just north of around $4 billion in the U.S. with the remainder of the balance across international markets. And over the years, talking about 7 or 8 years ago with their oral products coming out that have better efficacy, better safety profiles. You've seen this expansion of the market where orals are growing faster than the rest. And there's a transition coming from collars and topicals into their oral products. And even as we were actually third or fourth to market there, the products that were launched ahead of us continue to grow substantially after we came into the market, again, underscoring this point about the expansion. Now if you look at Trio, triple combination, we launched in the middle of 2020. So still relatively new in the context of 8 years of roles. And in the second quarter of last year call we gave some statistics around Trio, including that about 30% of the dogs that were being prescribed Trio were had not been prescribed an oral parasiticide in the prior 18 months. So that gives you a sense around the expansion that we're seeing, again, coming from the topicals and collars into here. And one other point I'll make is, we grew almost 60% in 2022, right? Again, the product continuing to ramp. We expect it to be a strong contributor to our growth in 2023, though not at the rate that you've seen it grow certainly the last [indiscernible]. But even as Trio grew 58% on the year, other oral medications grew as well. I would just underscore that this is continuing to show this point around the expansion of that end of the market growing faster than parasiticides in total, that's growing around 5% or 6% in line with the overall market, but the oral end of the market growing faster, and that's what we expect to continue even with competition.

Questions from the audience? So let's stick with the Triple area. And of course, you have some competitors coming. What is your competitive intelligence telling you about the competitors that are looming on the horizon?

Look, it's never 100% clear, right? Until there's an approval and until there's a label, you don't know what you are exactly up against. But I won't repeat everything I just said around the expectations to continue to grow. But I will underscore a couple of things that are really important here. If you look at Triple combinations, you're covering flees, ticks and heartworm. Heartworm is the deadliest among those and it is prevalent across every state of the U.S. There are some markets outside the U.S. You look at Australia, Brazil, parts of , et cetera, outside the U.S. that Triple combinations are relevant because there's heartworm but if you focus here for a second heartworm is the deadliest. And so our product gets to 100% efficacy after the first dose. And I think that's something we're going to continue to watch here in terms of what we have as a competitor, it's hard to get better than 100%. So we'll have to see where that is. But overall, we're not expecting any differentiation to the negative here. And we do expect this to be largely a market expansion play as opposed to a sort of a price play. And again, it's about expanding the market at that end, given the profile and what we're seeing across the oral products.

Maybe we can move to the derm area, another area that Zoetis has done very well in over the years. Where do you see future growth for Apoquel in set a point coming from? Are these new patients? Is it longer therapy of existing patients? What is the nature of the growth profile?

Yes. Derm is an important franchise for us. If you look at Apoquel it's approaching 10 years. Cytopoint is about 5 years old. And if you look at this last year 2022, we grew 17% operationally, we grew 27% operationally across our international markets. We're continuing to see expansion of this market with both volume and price growth, of course. And as we've been saying along, in the U.S., we estimate about 6 million dogs that suffer from HNS that are not being treated. And by the way, there's about another 2 million that are getting anti-histamines and steroids. So let's call those undertreated. So there's still more room to continue to expand DTC driving awareness and bringing those to clinics to be treated. And even more so, I would say, outside the U.S., it's a greater number. And because we've been putting more awareness campaigns, we do DTC, even unbranded because our products are effectively when you look at the efficacy and safety profile of our products, if we get more pet owners into the clinic, it's likely our product is getting prescribed. So we can do that in an unbranded nature, giving -- not having a competitor in terms of our profile. Of course, there are other news, as I mentioned, anti histamines and steroids and so on. But given that landscape, we're able to do unbranded campaigns and bring more customers into the clinic, and we're seeing the fruit of that play out with 27% operational growth last year. We think there's a lot more room to continue to drive this. And by the way, we will continue to innovate in this space. Clearly, as I referenced earlier, our apoquel chewable is one example of that. And we'll continue to work on that product to get approval in the U.S. and we'll do more across this broadly in terms of innovation. We'll look at other species, et cetera, to continue to drive growth across derm.

Okay. So this is like all great markets, also attracting competitors, similar to the Trio conversation we had, what is the competitive intelligence telling you about emerging competitors in the derm area?

Look, there are competitors that are working on products, as you'd know. We don't have absolute clarity in terms of where everyone is, but one particular competitor has put some dates out there. We're not expecting a competitive launch in 2023. In this space, as you know, Animal Health, you don't have as much clarity in terms of where folks are in terms of their pipelines as you do in human health. But we won't venture to speculate in terms of exactly when others might come in. I will make one other point, though. I think Zoetis has certainly proven time and time again, being able to innovate scaling monoclonal antibodies if it is tanezumab, for example -- in the space is far from trivial. And I would say that's something we've demonstrated being able to do. And our products have been on the market for years going on almost a decade. And if you look at the efficacy, safety profile and the satisfaction levels of customers and pet owners out there, they are extremely high. So again, we'll continue to innovate here but there's not clarity in terms of precision on when a competitor would come other than we can see far enough into 2023 to say we're not expecting a competitive launch in the year.

You've touched upon this throughout the conversation, but let me ask you that maybe at a higher level. So of course, [ arsiticides ], pain, dermatology, they're all really important categories to Zoetis over the long term. And you mentioned some innovation. But stepping back, what are the unmet needs in these categories? What do pets need that even these very good products are not meeting today?

Look, I mean if we look within those categories, specifically, I'll answer that, but there, of course, there are other categories too that we have interest in, and if you ask veterinary practitioners, what are the unmet needs there have been surveys of those, whatever they have got listed, you can probably guess as the leader in Animal Health that we're working across that spectrum. But within the areas that you just mentioned, whether it's in parasiticides or pain, which we've just launched products. I think across those, you can look at more broadly looking at derm, for example, across all allergies, you can look at injectable forms versus all solid dose forms. You can look at longevity of medications, just the long-acting and all type of things. So there's certainly more room to continue to innovate across these whether it's expanding into broadly more allergies or a different species within derm category, for example, there are plenty of places to go even within these areas. And parasiticides, as I've said, is the biggest category in Animal Health and others will be working on these as we are, and we have some franchises here that are very important to us, and we'll continue to innovate on those.

So let me just repeat the question for the webcast. So you mentioned the R&D spend upticking as a percent of sales. And actually, I forgot the rest of the question. So why don't you...

Yes. And so what in particular is driving given that I said the pipeline dictates the span, right, not the other way around? What's driving that this year? And Look, R&D is a long-cycle process. It's hard to pick a specific year and say this is something you did this year that caused it to increase. So the seeds would have been planted some time ago. And let me just give you a point that I think is really important here. Well, about 5 years ago, we launched Cytopoint, right? And it's the first time you have a monoclonal antibody in the hands of a general practitioner. Now on the human health side, where I've been most of my at least life sciences career, you would go to a specialist, oncologists or what have you, that would be prescribing a MAB. And so it was a little bit of a question mark as to how -- what the uptake would be and what the comfort level would be for a general practitioner vet to prescribe and inject a monoclonal antibody into an animal. And so Cytopoint has proven that to be a real market and a technology platform that we could use going back to the previous question, what are the unmet needs across therapeutic areas. So then you step back we can use MABs now to go after certain therapeutic areas and started to invest in that from a research, et cetera standpoint. And so those things start to have implications around your pipeline down the road a number of years later and going forward, which is one element, I would say that may be influencing what you're seeing here among others.

So we're just about out of time. When you appear over the next decade, what do you think will occur at Zoetis that will be most surprising to investors? Will it be massive innovation? Will it be your commercial capabilities to keep competitors at bay? What will it be?

I don't have that kind of crystal ball, but here's what I would say, I would expect to be -- have been consistently driving us and that will continue to drive us. We look at unmet needs, and we're able to really take innovation not only in terms of what we do in R&D, but look across how that translates to commercial and developing your market? And how would that translate to in terms of scaling from a management factoring perspective. And those are the things that combination of that have driven our success in the past and I believe will as we go out. The other one is, look, I think these markets have proven to be, and we're seeing an appetite and generational maybe shift when you think about Gen Z and millennials and the value they place on pet health, et cetera. I think on the livestock side, continued population growth over the next 2 or 3 decades where we grow to 10 billion people on the planet will continue to drive protein consumption and so on. But that appetite and that prioritization of pet health is something that to be higher spend per visit, et cetera. And I think that's driving a market size that makes it where -- if you look at a particular therapeutic area, let's say, go back 10 years ago, and you said, what would the value or size of that market have been versus today versus 10 years from now? I think that's a continual increase in those areas that then justifies what you spend on it from an R&D perspective. And I think the things that will drive the industry that will drive -- certainly drives Zoetis is the leader in the market.

With that, we are out of time. It sounds like a very exciting future, and thank you for telling us about it.