Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

Ladies and gentlemen, the program is about to begin. At this time, it is my pleasure to turn the program over to your host, Michael Ryskin.

Great. Thanks so much for joining us, everyone. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team, also covering Animal Health. We're excited to have joining us for our next session, Wetteny Joseph, CFO of Zoetis. Wetteny, thanks so much for being here.

Thanks for having me, Mike.

We'll use the same format we've done for the others. It'll be fireside chat. If you've got questions, please don't hesitate to submit them via the Veracast portal, easiest way to flag to my attention.

Wetteny, just to kick things off, standard opening question, you guys reported 4Q results, kicked off '25 guidance a little bit earlier this month. Can you sort of run down key talking points, sort of what stood out to you from the quarter? And what are the key things to keep in mind for 2025.

Yes. Look, I think if you look at 2024, it was an outstanding year for us, and the fourth quarter was equally outstanding. The underlying demand that we see across our portfolio, starting with our companion animal portfolio, drove what you saw as a broad-based growth for us and double-digit growth across all of the three main key franchise areas and double-digit volume growth as well for them. So clearly, the demand picture is strong for us across the landscape. And the fourth quarter, though we printed 6% operational growth. Keep in mind a couple of things. One, we have the MFA divestiture. Without that, the 6% becomes 9%. And then we had two big launches in the U.S. in companion animal, both Librela and Apoquel Chew. Without those, you have a number that lands you somewhere between 10.5% and 11%. So it really was the same quarter as we had all year, if you will. And that gives us momentum as we exit '24 into 2025. And really, we are at a stage where we're very happy and excited to share not only our confidence in our existing franchises and what's left, which is significant more room, but also excitement around our pipeline, which we unveiled last month in a different conference around just how much more we have and our confidence to launch or at least get a significant approval each over the next several years. I think that's a really nice setup for us as we look ahead.

Okay. That's a great overview. Let's dive in a little bit deeper on some of these topics. So first, Librela, I think no surprise, that's where a lot of our questions come in. Maybe just to kick things off, you recently had the Dear Vet Letter, update to the label that came with that. You finalized those label updates you announced the other day and sort of like they've been locked in. Do you expect any additional changes from going forward from here? Or is this sort of -- that it, we can stop talking about the label and it is what it is?

Look, it's great to have the label finalize. As we've talked about before, it's not uncommon to see label updates within the first couple of years of our product launch. And certainly, we expected to have label updates, and we've had them in other markets as well across our international offerings, in Canada, U.K., Switzerland and so forth. So having label update in the U.S. was certainly not unexpected, and it's in line with what we expected, which is great. So it's good to have it finalized and have the official approval from the FDA. It's not that label changes can't happen any other time during a product life cycle, but it tends to happen more consistently in the first couple of years. And in terms of what this has done, the finality on that is great because it creates that for our vets and our field force, quite frankly, who've had a lot more discussion around, well, adverse events that are on this label versus that one, et cetera. And now that's effectively behind us and has been received -- well received from our customers, and consistent with what we told them to expect. The great thing about this for me is clearly, if you go back, we launched the Librela and Solensia in our international markets before the U.S. And it took us some time to get to the point now where we have 2/3s of our [Audio Gap] moderate to mild cases. And we want to accelerate that in the U.S. And clearly, over the last year, given the amount of attention that's been made to the AEs and the label that has kept us from having 100% of our focus on driving that acceleration, which we wanted to do. And I think this is a nice pivot point to drive that even more holistically as we go forward.

Maybe following up on those points. You just talked about what you've been able to do in Europe in terms of moving from severe to more moderate, how you're doing that in the U.S. Any impact on that from either the vet letter, the Dear Vet Letter? Or just some of the sentiment and commentary in the news over the last, I think, almost a year now is when the headlines really started hitting last year. I think it peaked in like sort of the April, May time frame. But just sort of what do you think the impact of that has been on ability to ship from severe to moderate?

Well, I think certainly, the question is just one, sort of flow that has naturally as we've seen. And clearly, we're doing a lot of education of vets and pet owners throughout this. But it took some time, as I just said, to make that transition in our international markets and in Europe our intention was to drive that faster here. So while I can't sit here, Mike and say, this is the exact impact of all of that noise in terms of what would have otherwise happened. But what we would have had 100% of our focus in driving and influencing was having to spend more time with vets to educate them, here's the label, here's what we're actually seeing in the data, here's why we're very confident in the safety and efficacy of the product. Here, the rates that we're seeing, and they're all using the EMA classification, rare in every classification. So spending that time, which was important, is also time that would have otherwise been spent just driving our agenda, if you will. And so I think that you have to argue has had some sort of impact, even though we can't quantify it per se. And again, this is really, I think, a great pivot point, if you will, to drive that inflection from here forward.

Now that you've had a little over a year on the market, how are you thinking about the efficacy of your vet education? I mean by that is we've always sort of debated how much Dear Vet Letters matter. We've debated how much labels matter in animal health because a lot of vets just don't pay the same attention to it. So you're implementing steps. You're doing webinars, you're doing office hours to educate vets. Is that having a payoff? Are you able to sort of deliver the message you're going for in terms of impacting their behavior.

Absolutely. Look, there are vet-to-vet conversations that are happening throughout. And I want to just make one point, these areas that we've talked about that we've highlighted having office hours and so forth, they're incremental to what we normally do, but they're not new, these are all areas that we always spend a lot of time on when we build a market, and we certainly have a track record of doing that as a company time and time again. So we know what it takes. We know the education. We know what it takes to get the product into clinics. And the great thing is, in the class of Librela, it's a record speed of getting the product into as many clinics as we have. We're talking about 85% plus penetration. That is a great fertile ground for us to then drive the education for incrementally what type of cases do you use this in, how do you go from more severe to more moderate, et cetera. That work is always work that we do in any product that we launch and how we build those markets over time. We now have a real great ground basis to do that from is just that we've had this other piece on the label that has taken more attention and now we can move that behind us and forge ahead there.

So how do we think about further growth in current levels for Librela? You talked about double digit for your growth products in 2025. But I'm just thinking about you just flagged the clinic penetration, you flagged the expansion from severe to more moderate cases, what's going to drive further adoption of this sort of like where do you see opportunity? Because you're talking about a long-term potential for Librela that's still significantly bigger than where we are now from a dollars basis. So walk us through the untapped part of the market today.

I'd love to. So look, here's how I look at the OA pain and then we'll hone in on with Librela specifically. In 2024, our global revenues for OA pain were approaching $600 million, okay? We said in 2023, we would see the OA pain franchise being north of $1 billion in 3 to 5 years. So clearly, we're well on our way there. We're more than halfway despite all the conversation around how well -- this launch has been a very successful launch in the U.S. Now let me just sort of break it down a little bit on the opportunity that we see in terms of Librela for the U.S., though this is a global opportunity, but let me hone in on this. In the U.S., you have in terms of medicalized dogs with OA, it's about 27 million, okay? Only 9 million are currently being treated and Librela is treating just over 1 million of those. So if you just take a look at those that are being treated, the 8 million are largely on NSAIDs and the Librela has 1.1 million as we exit 2024. That 1.1 million, we locked in at $201 million of revenues from that. That's because you have more months on therapy when you own a product like Librela because the safety profile is so much better than an NSAID that as you convert from those 8 million to more going on to Librela, that by itself is a massive opportunity, again, 1.1 million out of the 9 million. And that's not even addressing the rest of the 27 million who are not on treatment at all. And by the way, just as a reminder, what we quoted in Europe after sort of the second year or so was that about 40% of the cases were new to the category, which means they weren't on NSAID, they weren't inside at all. So if you follow that math to the U.S. and you look at the size of this opportunity here. We're in the -- if you want to use a baseball analogy, we're literally in the first inning. There is tremendous more opportunity, and I didn't even talk about Solensia. I'm just talking here in terms of Librela. So this is a huge market opportunity with many years of growth to come. And clearly, Librela is an important product across our portfolio, and we haven't even been talking about the rest of the portfolio, which has significant more room as well. So I think the size of the opportunity here is undeniable. The question is how fast are you going to get there. But certainly, it's going to take years to continue to drive this. And we're seeing this play out in other places where we're talking about significant growth the decade after we launched the product and create a market.

That's really useful color. I appreciate that. So thinking about that 1.1 million versus the 9 million in the U.S. You mentioned NSAIDs, again, a lot of that is RIMADYL or other carprofens, maybe Galliprant in there as well. How do you get that 1.1 million higher, right? So what are the levers you're talking about? Because like you said, you already are in the majority of the clinics, people know the product. Is it more familiarity with it, more time with it? Is it -- and I'd also say is that entire 9 million achievable for Librela over time? Or you kind of see -- there's always going to be some that are going to stick with NSAIDs for various reasons. So what is the realistic ceiling there? And like what are the key levers to get there?

Yes. Look, this is not a new territory for us. We have done this time and time again. These are very different therapeutic categories, different prevalence, et cetera, et cetera. But if you look at derm, for example, in the U.S., we're treating north of 6 million, call it, 6.5 million, there's about 3 million that are on steroids, right? So I won't sit here today and say we're going to take all the remaining 8 million and move them to Librela in this case, but there's a tremendous opportunity here. Along the way, we'll have things like head-to-head studies that show the safety profile of Librela versus an NSAID or generic carporfen, which, by the way, is where we've seen a significant portion of that 1 million coming from, et cetera. So there are lots of sort of tools in our arsenal that we have proven that we've worked before to drive the market growth that we'll continue to. And as those come through, you'll continue to see more and more utilization out of those clinics that have the product already.

Okay. And if you think about -- you mentioned Europe as well, obviously, you have a little bit of a head start there, still see long opportunity there as well. Other geographies that we should be mindful of where you're expanding because that's historically that's been a pretty important driver of growth for other products when we think about derm or Simparica is you do have a little bit of a cascade as you expand to other geographies. So remind us on the international footprint, where else do you have as catalysts for Librela?

Yes. Look, we see opportunity around the world. Librela has been approved now in over 50 countries. Of course, the level of how far we are in the launch, it varies depend on when we launch them. Europe is furthest ahead. We now have gotten to the point where you have 7 to 8 months on therapy. And so when we talked about the 8 million that on NSAIDs, the NSAIDs typically are going to have 1 to 2 months, call it, of use, whereas you can be on Librela for much longer, obviously. So [Audio Gap] so as you think there's a massive amount of expansion of the market that will take place and clearly across the different markets around the world as far as 2/3 as we are, and plus there will be other markets. Now of course, the most -- the biggest markets already have the product in terms of approvals and launches, but there's still more to go and certainly a lot more in terms of penetration to go around in terms of utilization across those markets.

Okay. And then for 2025 specifically, I think we've debated a lot, obviously, the quarter-to-quarter fluctuations in Librela. I thought you had a really good slide a couple of months ago where you showed Cytopoint historically, you're also going to have variability there. Going forward, what do we expect from you for Librela for 2025 in terms of like the level of detail you provide, the level of commentary. I just want to make sure we're thinking about this appropriately, so people aren't surprised on the 1Q call.

Look, we're very confident in how '25 is set up for us here. And we expect to have sustainable growth across our core franchises. And that's why we said, hey, look, this is not a company that's just dependent on one product, right? We've demonstrated that time and time again. We have our major franchises that are growing double digits for us in 2024. We expect them to grow double digits in 2025. While as important as Librela is, it's not -- we're not entirely dependent on what happens with Librela, this is why we want to continue to drive this. We're very excited about the opportunity for Librela, certainly, but it's broader portfolio that we have that's going to continue to drive us. And we're excited about new product cycles to come as well as we sit here coming from. Now we said sequential quarter growth is not a metric that we track in terms of gauging success of a launch. That remains the case. One thing I would say about the U.S. versus international, we spent some time talking about that here in terms of how much penetration you have into the moderate to mild cases that does drive a difference, though. If you think about it, when you have more severe cases, that are older who will not be on the product for other reasons for a lot longer, then you're going to have to replace more of your patient base before you can grow. You could have the same number of patients in the U.S. that you do internationally and see more growth just because you're not replacing as many in international as you're replacing in the U.S. just by virtue of that. So that is going to drive a little bit more, shall I say, lumpiness around this, which is showing itself in terms of the sequential. I just -- I don't think I need to repeat just how big of an opportunity we have here in terms of driving this, but I think the key transition is going to be following what happened in Europe to move more and more into moderate to mild cases.

Okay. I want to make sure we cover all the bases. So let's touch on a couple of the other key franchises. Let's go to derm, I mean, a market that you've been dominating in for years and years and years. You're starting to see competition for the first time ever. So you guys, Librela has been on the market for a little bit. We're expecting another competitor at some point this summer, mid-2025 for Merck. How much have you built into your assumptions from competition? And more broadly, how do you think about competition for derm? And what strategy do you have in place to mitigate any potential impact?

Look, we've been at this for some time. And as you said, we've been in derm. I don't use the word dominate, but we like our position both in terms of the number of years we've been in this market, the level of satisfaction our customers have in the efficacy and safety of this product, and the multiple products that we have in our arsenal to meet different needs of our customers. You can have a film-coated tablet with Apoquel, you can have chewable with Apoquel Chew, you can have Cytopoint, which is an injection a 30-day or a monthly injection, if you will. So we have more tools in our arsenal because we've been in this market for so long, and that puts us in a great position as competition comes. Beyond here, even before I get into competition, this is not a zero-sum game around a market that's mature. We're talking about a market that still has more medicalized dogs that are either untreated or on some sort of steroid, right? More of those than we're treating today. So that, to me, by definition, is not a mature market because you have plenty more room to grow. And so I think the -- before I get into the premise of the question around competition, is that we think there's so much more to expand this market, that this is a nice sort of opportunity for the industry and certainly we have a massive lead here, which should accrue to our benefit as that expansion unfolds. So what do we factor into our guidance as we always do, if we expect some competition to come in at some point, we want to make sure that we're able to look at what that label looks like. We don't expect to have substantial differentiation against our product. And by the way, just to sort of prove the point around how important it is the level of satisfaction our customers have. We have an Apoquel product that's been a market for 11-plus years. We launched Apoquel Chew and our vet clients are saying, look, we're so happy with this product. We don't really see a reason to change from Apoquel to Apoquel Chew. So I do think that's really important for folks to sort of appreciate what that means in terms of what a competitor with a completely different product is going to have. But nonetheless, we're very confident in our ability to continue to grow and drive the expansion of this market beyond competition, but we do factor some scenarios in our guidance for any given year when that competition -- competitive launch will go up because in the short term, we can have some motivations that the competitors are going to offer to a customer just to take the product on, because otherwise, like I said, even switching from Apoquel to Apoquel Chew is somewhat of a challenge, so just imagine. So to do that, they're going to give some incentives to the short term. But long term, we expect to be able to continue to drive this, which is why we exercised that discipline, but we factored that into our guidance for the year in terms of what we expect.

Okay. So there's a little bit of a buffer built in or maybe some assumptions around both Zenrelia and the Merck product.

We always do that in terms of what we expect from competition, not just for one category, but across products.

Yes. And to your point on stocking dynamics, maybe initial pricing, I remember this was a lively debate when NexGard PLUS first got approved because there were some really weird moves with inventory. And the first 6 months, even before and after launch, a lot of volatility, but then it kind of seems to shake out because, again, like you said, it's introductory pricing, it's introductory stocking. And then once normalized, it becomes a little bit more of a, I'm going to say, rational market. So maybe some near-term volatility, but, yes.

We've seen this movie many times. And we -- look, the other thing I would say is to the example you just gave, when it settled out, what happened Chewable grew 25% in that year, in that first year of competition, again, I'm not saying that's exactly what's going to happen in the case of derm. What I'm saying is there is a level of confidence that you have in terms of how this is going to drive the first-mover advantage that you have, the satisfaction levels, the multiple products that we know we'll be able to continue to drive growth in terms of leading the way in this therapeutic category.

Okay. Great. And then just to throw it in while we're on derm. The other part is obviously Cytopoint. You've had -- some of your competitors have also said they've got IL-31 antibodies coming out. Until we know more, our base case assumption is, like you said, there's not going to be significant differentiation and there will be relatively similar to Cytopoint. But one of the levers you do have in your position on derm, is you have Apoquel, Apoquel tablet, Apoquel Chewable and Cytopoint. So you've got that sort of multifaceted approach. If someone else was to have multiple sort of arrows in the quiver, does that change anything? And sort of what would be your counter to that?

Look, I don't think that changes anything in any significant way. Not to be arrogant about it. I do think it matters how long these products have been in and what level of satisfaction customers have. So it means chew product that's not significantly differentiated, will they be coming into a market that has substantial more opportunity? Will they be putting dollars behind DTC that drives more awareness and more patients come into the clinic, asking for these solutions? Yes. Will they grow? Probably. Will we also grow? Yes. And so I do think that there's enough room to expand these markets, which is why you see and you gave the reference earlier as well in terms of what happened after the launches on the parasiticide side for all flea and tick products. This is the thing that is very different from human health to animal health, which is these markets are still very young and there's still significant of medicalization and medical intensity to drive this market. And as others come into this, unless they're significantly differentiated, you don't see a switch. And so the question is, how much more awareness do you drive? Do you drive the expansion even faster than one player does, when you have multiple players, and that's what we've seen play out.

Okay. And I think another point to add there would be that competitors are often flagging what new products they have and what they're working on. You're not necessarily telling us all the offsets you have, right? So if it is a year out, maybe there's something in your pipeline that's there as a defensive move. I mean, on that point, let's talk about -- you've given a little bit more visibility into your pipeline recently than you have in the past. As you said earlier this year, you had that useful slide on 12 to 18 months, 18 to 36 months or sort of like what's in the pipeline, what you're working on? A lot of products there. Anything in particular that you want to flag as what you're most excited about, sort of what are the bigger categories, what are the bigger opportunities?

Yes, Mike, absolutely. We're very excited what we have in our pipeline. I would say before I even jump to that and not to be repetitive because we've covered a little bit on what's left in OA pain, which is a massive amount of opportunity. We talk about what's left in derm, 20 million globally. And then let's talk about parasiticides, where you still have about 1/3 of the market in triples, but triples are over 50% of puppies. So significant room to expand as you think about where the market is going there, and we like where we stand as a first-mover and having 3, 4 years head start before anyone came into that space. So you look at three major product categories and franchises where we're very excited about the future on those. Now then we're also entering what I'll call new product cycle that's beginning here if you think about the number of significant approvals we expect each year going forward. And first, let's talk about expansion of existing products in terms of long-acting components of monoclonal antibody, which are net incremental for us when we think about revenue and what those will drive. Just consider asking a pet owner to show up once a month, particularly as you go into more and more moderate to mild cases, then you're talking about multiyears on these products, and to ask a pet owner to show up every month for an injection on a product where it's not a severe case where the dog is 14, 15 years old. We're talking about younger pets that are going to be much longer. Then you think about what that means in terms of the potential to expand and have much more compliance, much more injections when you can have multiple injections in one. So I think that is very meaningful and incremental when we think about long-acting in that -- through that lens. And then we have these areas like renal with chronic kidney disease and oncology and cardiology which we're very, very excited about. And we've given more details in terms of the time frame by when you can expect those as we've seen progression and the size of those markets, in some cases, significantly increasing from just 2 years ago when we talked about them, particularly in renal, where now the advance -- and also, to some extent, oncology, the advancements that have been made in terms of diagnostics to be able to identify more of the prevalence rates. And then as you have a therapeutic, that also drives more diagnostics and drives more therapeutics. It's sort of a nice virtuous cycle where you're going to diagnose more, but you have a therapeutic that really changes the game, and therefore, you'll see more treatment rates. So that starts to -- and as we know more about the profile of our product, too, we're able to have better gauge with our customer around if this is the type of profile we have, how much more will you treat and therefore -- and what's the value of that, right? And so that combination translated to a significant increase in terms of the sizing of these markets, and we're very, very excited about the future potential of those franchises.

So specifically on the long-acting components, that's an area we've had a lot of debate on the long-acting monoclonal antibody essentially. That's where we've had a lot of debate, and I'm really hone in on how to think about this. I mean you just specifically said, you think it's going to be net incremental in terms of revenue. The example you brought up for long-acting Librela or Cytopoint makes a lot of sense because if you're going to be on it for years and years, once-a-month becomes a little bit challenging for people with the vet. But how do you quantify or sort of like what are your initial thoughts around cannibalization there? Because one thing I worry about is it maybe some of the shorter-term cases where, yes, pet is only on the drug for 3, 6, 9 months. You go from once-a-month to once every 3 months, especially if there is any kind of pricing difference there, that could be pretty cannibalizing to some of that short-term revenue base. So how do you weigh those? We just -- we really don't have any precedent here to think about it.

Yes. Look, we're certainly not unveiling what our pricing strategy is on these, but clearly, there are lots of factors we're considering. And by the way, we're also doing a lot of market studies on this to gauge pet owner and vets in terms of where that right way to optimize that is. And so we're confident in our ability to drive and create value through this, and drive the convenience and higher compliance for pet owners as well. There's plenty of room to do that and drive both of those objectives, if you will, around how we see the future here. Again, I'm not going to go into specifics in terms of what their pricing looks like. But I think if you think about the case of cats, I think that might be the most maybe extreme case to think about getting a cat to the clinic every single month for a long period in terms of years. And clearly, you can see the value proposition there for a pet owner. And then the question is how do you price it in the right way to drive that. There will be some cannibalization, right? I mean there will be some that are going from a monthly injection to a multi-month injection. We believe there's always going to be a market for the monthly injection. And by the way, not only because you may have a much, much older pet that's more severe, you're not sure how long they're going to be around. You're not going to put them on a multi-month. And then for the first time, you're treating a pet, you're likely to use a 1 month before you put them on something that's going to be in their system for 3 months. So do we see a market for the monthly as well as a longer acting component. There will be some cannibalization, but net-net, we see significant incremental opportunities here.

Okay. That's all reasonable. We've got about 10 minutes left. I still have a lot of ground to cover. So I'm going to sort of pick and choose some of the other questions. Maybe on the topic of innovation and new products, one thing I always think about is incremental margin contribution from your products, right? I think that's a trend you've seen with Zoetis over the last 10 years is obviously where the innovation comes in, especially once volumes ramp up on Apoquel, Cytopoint, Trio, Librela, you name it, those are all really, really powerful incremental margin contribution. So especially once you consider the monoclonal antibody component, you talked about the margin differential there versus a small molecule. How do you think about everything you just said in terms of long-acting, in terms of future pipeline, renal, kidney, oncology? How does that fit into your mindset of where margins could be for Zoetis longer term? Because it's always been sort of open ended what your peak margin potential is. Can you bridge those two?

Yes. Look, I think one of the wonderful things about this industry and our position in it is that -- and this question was asked earlier, it's not -- we're not forced to have to make a trade-off between continuing to sustain long-term growth and margins. We can do both because there are so many large unmet needs that are really significant for vets in their ability to treat animals and keep them healthy. And we have the innovation if you will, capability and products to continue to solve those and endeavor to solve them before someone else does. And so that translates to the ability to continue to drive margin and pricing in this business. So the direction of travel is clear. The question is how fast and by how much, which we have not sort of stated because we want to make sure we continue to make the right long-term decisions around where we may see an opportunity to invest in something that's going to continue to drive what I just said, which is continue to see significant more room to do both. And so for that reason, we haven't necessarily put in a range of how much more, but direction of travel is that. And there will be times, too, when we will build capacity to drive demand across a product or a set of products and it may take longer or some time to get to optimal utilization of that capacity. And so while it's accretive, how accretive is a different story of how quickly you get there. So I think there's some of the variables that play. But clearly, between companion animals, even if you look at the 2025 guide, while I'm not -- I don't want to get into a ton of specificity, but we said livestock grows 2% to 4%. We're going to grow 6% to 8% and our major franchise is going to grow double digits. Well, those major franchises have the -- arguably the most pricing power, et cetera. And so you can see that continuing to drive a mix shift that's favorable to margins as you go as well. So I think that we see that opportunity continuing as we look ahead. And in the context of these pipeline areas that we're very excited about that are major unmet needs for our customers. We see that continuing as well.

Okay. So then in terms of the various levers at your disposal, whether it's gross margin or SG&A and R&D, I mean, I think you just kind of said you've got specific pockets and areas where you going to invest in all. Again, longer term, if you think about your -- the way you frame your long-term margin target essentially is you're going to grow EBIT and net income faster than revenues. Where do you see most of the uplift coming from? Is it gross margin or SG&A leverage?

Well, I think if you look at -- not that 1 year completely tells the story, but I think you saw a balance between the two in the last year. I think if you look at how we've put the guidance for 2025, you can see that balance as well. Now as you move up the growth rate on the top line, it tends to favor higher leverage of SG&A, generally speaking, just because you have natural rhythm of the P&L in terms of a certain amount of merit increases or whatever it might be that's driving that. But as you start to go up, those don't go up exponentially. So there may be some variable comp that goes up based on the performance. But otherwise, you have that leverage power there that can drive that. But overall, I see balance between the two is what I would say in terms of where that leverage comes from.

Okay. And then maybe one on the balance sheet and any optionality there. Very, very healthy balance sheet for years, a very cash flow generative business, even allowing you to invest a lot in CapEx like you did last year and still sort of generate strong free cash flow. You've also recently did the MFA transaction with Phibro that brought in a lot of cash. Just remind us best use cases for cash and investment priorities.

Yes. Mike, look, one thing I would say going back to your prior question and then it feeds into this one is that if you look at the investment cycles that we've been through, we went through a pretty significant one for our field force in the U.S. And I would say we continue to have opportunity to continue to leverage that. So obviously, we're still on the other side of that investment cycle. We've been through a 3-year period where our R&D spend was well above our top line growth rate. Now that is not a dial that we sit here just turn left or right. We do let the pipeline dictate and depending on where the pipeline is, obviously, it's not equal distribution of spend. So if you have a lot of products that are approaching going from research and development, that increases your spend. But you could see that we now in 2025 are guiding to R&D that's in line or slightly below the revenue growth rate. So I think you can see in terms of where we are on that cycle, we're more -- I'm not saying this is not the last investment cycle we'll ever have in the company. But I think we're sort of on the other side of some -- there'll still be a need to sort of invest behind new brands and products in DTC and all that, right? But the setup here in terms of the P&L is good for us. We do have to continue to climb up the utilization rate on some capacity we've built in terms of how much you see in that gross margin line. But otherwise, through the P&L, we see opportunities to continue to accrete in terms of the leverage position that we see in the business. And so we're very, very excited about what that looks like. Again, I think we're on the other side of a number of these. From a balance sheet standpoint, we continue to generate significant cash flow. Even as you saw during Investor Day, we showed a 20% sort of growth rate increase across our dividends over the period as we continue to grow our dividend, but we continue to have significant free cash flow that we're buying back our shares. Last year was a record year we bought back $1.9 billion of Zoetis shares, just north of 2% of our float. And so I think you can see over the last few years in the range of somewhere in the $1.3 billion, $1.4 billion to $1.9 billion range. is what we've done, and the Board approved a $6 billion sort of buyback program just in what August last year. And most of that is still in our arsenal here, totally depending on our free cash flow and how that flows, but it gives us a lot of room to continue to exercise that. And what we're doing here is really driving, maximizing long-term value creation and how we drive investments in the business and then returning capital to investors via dividends and buybacks.

Great. Thanks so much. With that, we're out of time, we're at the top of our hour. Wetteny, I want to say thank you very much for joining us. Pleasure as always. Everyone on the line, thanks for listening in. And thanks, everyone, for the entire day. It was another really successful Bank of America Animal Health Summit and my pleasure to be everyone's host. Thanks so much.

Always a pleasure, Mike, thank you.