Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

In some of your commercials [ quite honestly a bit more ]

We also moved Apoquel chew into distribution, make sure that they were motivated as well to convert as many people. We really believe that pet owners that are on our product and are really pleased with our product have no reason to switch. So as you look at sort of the seasonal and chronic pet owners that have used Apoquel for a long time and really, really like it, they're going to stay. And if they, even better, have a beef-flavored chew versus going back to film-coated tablets, they're more likely to stay with us, which limits the market for a new entrant to really be focusing on more of the new starts, new dogs to the category space. We are more and more seeing also lots of vets and pet owners preferring Cytopoint and preferring injectables. So we really feel like our ability to continue to grow the market and also defend our franchises, I think we've got a very strong life cycle innovation approach to doing that.

Okay. And did I get a chew number from you for the U.S. by the end of the year?

Did not.

Okay. And I'm not going to get one?

You're probably not, no.

Okay. Fair enough. Any questions? Got it. Competition. For several months, I'll sort of lay out what we've heard, and then you can tell me if it's reasonable or not. But we've done our -- I think, our homework on Zenrelia. We've repeatedly heard chatter about no induction period. So no 2-a-day dosing for the first 14 days. And maybe superior efficacy on the label. Let me go after the second point first. I think the efficacy on your label is around mid- to high 60s. But when I do my work on the channel, I always get back hey, I think it's 80% effective, 85% effective. So maybe let's start there, Kristin. Do you think the real-world efficacy of Apoquel is considerably higher than what we might see on the...

Yes. I think this is one of those spaces where I really feel like if you talk to vets and pet owners, there's very few people who are like -- there's definitely a lack of efficacy for every product. There are certain pets who do not respond, and that will be a great market for someone else coming. But oftentimes it's the class, which would mean, whether or not the new competitor would also be effective in that dog remains to be seen. I don't think lack of efficacy is our biggest complaint about our product. I don't really think there is a biggest complaint other than, we really like competition and we'd like to pay a lot less for your product. That is the number one thing. Again, I don't think the 2 pills a day for 14 days now that they're beef flavored really, two treats a day for 14. Like I don't think that's also -- I mean, we have heard that, that there -- if that's your differentiation, that lasts for 2 weeks. And maybe that's really important for those -- some of those new starts that are really acute, I don't really know. But I have not heard about the significant label differentiation, to be honest. We have heard what you've heard with regards to the induction period, if that really is the movement for somebody. I think vets trust our product. It's been out on the market for over 10 years. They understand the safety. They understand what to expect. I think there's a huge advantage to that.

Okay. And maybe I'll go down the road of market share. You alluded to this a little bit earlier, but you think most of the battleground will revolve around the new dogs. Is that fair?

New dogs or dogs that didn't respond for whatever reason. Those will be [ near ]

Okay. And again, the nonresponders, you believe is very different. It's not one less 65% to 70%, it's one less real world of, I don't know, 80% to 90%.

Correct.

Okay. And then I'll move to maybe your response in pricing. So in the past, we've seen you guys get aggressive on price, not so much in companion animal, but let's go over to livestock and just DRAXXIN. You meaningfully lowered price to preserve volumes. How are you going to -- I don't want to say how are you going to compete? How are you going to defend here? Is it sort of, Jon, think chew, think distribution, think safety, that's what we'll lead with and put pricing more secondary and in the background?

I would say, first of all, I don't think livestock is a good -- having a generic competitor [ in ] 7 of them is a very different place than an innovative competitor with a unique molecule, with a unique label. Like if you look at DRAXXIN, it was generic Draxxin. I wasn't -- like other than like the safety and efficacy of my manufacturing site, it was the same exact product. So I don't think that I would look at that as an analog to what you would look at in this case. Obviously, until we understand what the label is, what their differentiation is and what their price is, it's hard to respond to a theoretical. But I would say, I think we have an innovative product. I think we have a beef flavored chew. I think we have a lot of reasons to believe, and years of safety data to say, we don't need to play a price game. Will we run a promotion here and there? Sure. But I would be surprised if it becomes a major -- I don't think either party wants a race to the bottom on price.

Yes, and a duopoly of a $1 billion-plus market that's still like [ plain hat ]. Okay. And then last question on Apoquel would just be your conviction on growth in 2025 U.S. So here they come, they are coming. And they're going to have some international markets, but predominantly in the U.S., you've had some price at your disposal and volume growth. Do you still think that U.S. franchise for Apoquel is a grower in 2025?

We do believe it. I mean, I think we believe that this category is going to continue to grow. We believe -- again, I would speak to the category versus the product because we have, like, Apoquel, we have Apoquel II, we have Cytopoint. We think our dermatology franchise overall, I mean we will trade in and trade out of Apoquel versus Apoquel II and Cytopoint, the vets will. I believe that this market is still underpenetrated. There are still millions of pets globally that are not served. So I think that market will continue to grow and we will grow with it.

Any questions atopic derm, Librela, I'm going to move to Trio. Another really good number, I don't need to rattle it off for you, in 1Q '24. Just talk to sort of like the ongoing success. I mean you've had NexGard PLUS, right? I mean, a really big brand. They've come to market, the growth has been very resilient. We've done some work that you're winning in puppies. Where is that winning formula, where does it largely reside for you guys specific to Simparica Trio, the ongoing share [ you get ]

See, I think pet owners really love the product. Pets like, love the product. It's simple. It's easy. I think we've done a really good job. I mean, being first to market and really establishing it. We've seen others enter the market. They're just growing the market. They're bringing more people into triple combination. And as you look at. Again, this is a very competitive space and always has been in parasiticides. So I think as you look at people enter, the first thing they're doing is cannibalizing their existing sales, and then they're growing the market. We're pulling more people into the triple combination market. And I think that's what we've continued to see. I think the reality is vets and pet owner are very happy with the product. We've done a great job in retail. We're getting -- doing really well on auto ship, which is increasing compliance. So I think the other reason you're seeing the market grow is, the more times we get more pets on, more pets on auto ship, you're getting greater compliance, greater months. And there's no reason to switch. I mean, what's the reason to switch? The pet owners who were on, who were using the product on their pets, really feel like those dogs are doing well. Like, why am I going to switch because there's a new product out?

And arguably, that monthly compliance was starting from a pretty suppressed level, right? I mean, it's not like it was 11 out of 12 months to begin with [ relatively ] And so it has a long way to go and a long way to increase. What's the bigger threat for Zoetis, one or the other or none? If I throw Credelio Quattro at you or Merck's flea and tick injectable?

If you look at it from -- I mean we haven't talked about what I would have as well there.

We're going to do that. That's next, in 2025 innovation.

So what I'd say is -- do I think Credelio Quattro is going to dramatically change the landscape? I don't. And by the way, do I think it will grow and do well. I'm not arguing that...

That might cannibalize your own sales.

Yes. And by the way, do you really want to pick up a third parasiticide? Why are you switching? If you really -- if your customers and your vets are really happy with what you're carrying, you generally carry 1 or maybe 2, do you need a third? Unless there's significant differentiation, or you're solving something that pet owners are really worried about, they're not having a need met. I guess I'm a little bit more struggling with what is the big need that people feel is not being met on that one. So I think the compliance that you could get to injectables as you look at -- we already have an injectable parasiticide in ProHeart 6 and ProHeart 12. I think as you look at new disruptive innovations, we're really focused, and we've talked about sort of long-acting injectables as a key growth opportunity for the industry. So I think that will be the next wave of disruption.

So let's explore that a little bit because we had a couple of panels earlier today, and one of them talked glowingly about ProHeart 12. He really likes it, but he's also excited about the injectables. And it's got that theme behind it of trying to bring back revenue into the practice, right, after being disintermediated. So for you guys, do we think about a flea and tick offering for an injectable as part of 2025? Or is this that you might sort of try to leapfrog and move more to an injectable triple in whatever time period would accompany that?

We have not given guidance on that. The only thing we've been clear on is, it is a space that we are very invested in, and winning in that space really matters. So we are -- we were the first with an injectable, which is ProHeart 6 and ProHeart 12. We'll continue to invest in that space and continue to look to grow that, but we have not given guidance on Solensia.

Okay. I'll continue to try to go down the road of 2025 innovation. I know you guys have talked a little bit around hey look, next year -- well, I'll take you back to the Analyst Day, right, and you threw out some big opportunities, but you also had a multiyear time line associated with that. That seems unlikely to land next year in '25, maybe more '26 and beyond. For '25, should we be thinking more about life cycle innovation? And if so, what comes to mind would be longer-lasting mAb, IL-31. Maybe if you can talk around that a little bit.

I think what we think is the more near term is obviously incremental vaccines and things like that and long-acting mAbs. And I know we call that incremental, I think they'd actually be pretty disruptive if you could get long-acting monoclonal antibodies. A lot of competitors, how -- do you want to go every month and things like that, and there's a supply constraint on the vet side. So I think both vets and pet owners and compliance, having something that was like multi months would be a huge advantage. I think there's still a space for a single and a multi one. So I do think we've really said in the near term, you'll see lots of new vaccines, which I know you all don't model and things like that. So lots of innovation in the smaller products, but driving good growth and in long-acting mAbs, which I think is a bigger deal than I think some people probably expect. And we have not given guidance beyond that as to some of the other categories we did talk about, which is renal, chronic kidney disease, cardiology and oncology as the big [ statements ].

And to go back to the mAbs and longer lasting, what's the optimal dosing interval? I mean if I look at it like, a month is difficult, right? I mean compliance can be an issue. Do you have time to come in, and for every month I would think for the practice, it could be maybe a little bit overbearing. On the flip side, a 12 month could be difficult from a cost perspective, right? Because now the pet owner has got to absorb 12 payments of x. Is it 3 months? Is it 6 months? How do you see that playing out?

Yes. I mean, I think really, what we're hearing is there's a desire more for a 3 month as you look to start. And I think if they got comfortable there, then you could continue to expand it. I mean, this is a new space for the veterinary space. I think ProHeart 6 and ProHeart 12 are the first injectables that have really been, they've experienced, how do you price a 12 months? I mean -- and so I think vets are getting -- starting to get comfortable with how do you price these sort of longer-acting products, but I think as you look at that's a much less expensive decision than a long-acting mAb has been. So I think there's finding their comfort to safety and efficacy and how long someone wants to commit. And I think we'll look at a 3 month and then you can look at something longer than that. But I think that seems to be where the vets feel like the sweet spot is right now.

And just to take you back and sort of go through the iteration of innovation for you guys. It's like you crushed it with Apoquel, here comes competition. I've got the chew. I have got IL-31, there's chatter that's going to come to market next year, maybe long-acting at that point in time. And there's still an opportunity on the pain mAbs further down the road if someone comes with a competing product, where, again, that would be life cycle innovation among the longer-acting. Is that [ right ]

We are always looking at life cycle innovation on everything. I mean, I think that's -- we talk a lot about franchises. And I think that matters, which is we look at a space and we want to make sure that we're continuing to innovate and grow that market in anything that we enter. And so I think you saw Apoquel, you saw Apoquel II. Even if you look at DRAXXIN, Draxxin KP. We are looking at our brands as franchises and looking at how we can continue to expand those. Those are brands that we've invested a dramatic amount of money in and building those markets and building that trust. So we'll continue looking at every single space we have and how we can continue to build on that.

One more innovation, then we'll see what else I can get to. But are vets going to be comfortable using like a ProHeart 12 in a Bravecto Quantum in mixing, because the pushback that I've got is, if I use an injectable right now, if I'm using ProHeart 12, I still have to send the pet owner home and hope and cross my fingers that they're going to go ahead and use a flea and tick every month, right? So I'm not really answering or fully answering compliance. Do you think they'll be comfortable mixing and matching essentially like, their own home brewed triple injectable in that regard?

I don't know. I think that question is better answered to a vet. And by the way, I think it's hard for the vet to answer it today, because they don't have the data and the experience and the clinical data that would support that, is what I would say. I think it remains to be seen what that would look like. I mean I think they're very comfortable with a ProHeart plus a flea and tick. I mean -- so they're -- I think -- but you're asking more about the injectables. I don't think we have enough data to say yet how comfortable they would be. I think they'd want to see the data before they could tell you the answer to that question. So I think once those are launched and you can get a look at, like how are they [ seem ] and running trials and things like that. I think you have to get comfortable.

Last couple of questions and it might go over to an all-Wetteny question here or there. But maybe first, before we even go there, diagnostics.

Wetteny [ is not by ]

Abaxis acquisition over 5 years ago, we've seen several different approaches to market, right? Like you were leaning in the labs, you pulled back. Now you sort of made this transformation here in North America of selling direct. Do you feel like this was the last week that was needed and why the decision to lean more into the direct sales model?

Yes. I think as you looked at it, we first -- we got it and that we thought you know what, we'll sell it together. The vet gets one sales rep who will answer all your problems, and I would say that didn't work so well. And partly because we have a really broad portfolio, they didn't have enough time to spend and capital equipment sales were quite different. And I think then we changed it about, I think, 2 years ago, we said we want a dedicated diagnostics field force that's going to drive our equipment sales as well as our consumables. And once we got that up and running, we also realized that paying distribution to sell when they were pretty much distributing, to be perfectly frank. They weren't really selling consumables. They weren't talking about how you think about a wellness visit versus a derm visit versus a pain visit. We said we can much better spend that money, having -- investing that internally and being able to drive demand. I think we know that we're better at driving demand than trusting distribution. Distribution is great at distributing. And if you have the demand meeting that need, but that was really the movement to bring it inside. And I think we looked at -- if you look at our reference lab strategy in the U.S., it's really doubling down on our hubs and being able to meet that need and really thinking of more innovative technologies. I think we brought disruptive technology to diagnostics, which is what we promised when we did the deal. We brought an images platform. We have 6 indications on the Imagyst platform and growing. And I think having an AI diagnostic that can really disrupt has helped us get into clinics where we were really blocked before by long-term contracts. So we remain very positive and very optimistic on the diagnostic space and on our strategy and on our ability to continue to grow it.

And it still be -- I think when you did the acquisition, it was thought of like premium growth to corporate and gaining share. Are those...

Yes. I mean we said, look, we've been gaining share really quickly and done a great job internationally, which is what we said we would do. We said the U.S. would be slower. It is difficult, and it is difficult, a 6-year contract. You only get 10% [ step ] every year to negotiate, so.

Very last question, I promise you. Just 2025 margins and some of the moving parts there. Companion arguably grows faster, you get greater scale in Librela in '25 versus '24. On the flip side, price has been pretty prominent. Maybe that comes in a little bit. And I'm assuming Apoquel is your highest-margin product. So pushes and pulls, still some conviction that 2025 could be a healthy year for margin expansion for Zoetis?

I don't believe we've given specific guidance, but that was a very -- that was a great story, but I don't think we've given guidance for '25 yet. Good effort, though.

We'll have to end it there. Kristin, thank you very much.

Absolutely. Thanks.