Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

Thanks for joining us at the Barclays Healthcare Conference. My name is Balaji Prasad the senior analyst for the specialty pharmaceutical sector. Continuing our session for the day. I'm delighted to have Wetteny Joseph, the CFO of Zoetis with us. Wetteny, thank you for joining us at the conference and hope you have a great conference.

My pleasure as always Balaji. Great to be with you.

Thank you. So Wetteny, Zoetis recently reported Q4 results. Obviously, the stock did move a fair amount on -- around the results. But I would like to leave it to you for some opening remarks around what are the key points there? And what are you seeing in terms of investor focus and attention and what has changed?

Sure. Look, we had an outstanding 2024 with the second highest growth rate the company has had in its public company history. And our major franchises in companion animal led the way with double-digit growth for us on the year. We saw for the second year in a row, livestock growing 5% and 6%, over the last 2 years as well. And if you think about our industry, it's an incredibly resilient industry but it's also still very young with substantial opportunity to expand existing markets that we have leadership position in including derm and parasiticides with the Simparica franchise, continue to have significant room to expand there. And new markets that we're barely just scratching the surface with OA pain, which I'm sure we'll talk about some more but significant runway there as well. And on top of that, we are extremely excited to share even more detail into what are really large open-ended markets that we have in our pipeline that we're going after, with respect to renal chronic kidney disease, oncology and cardiology. So a relatively young market that's very resilient, a leadership position and lots to be excited about in the pipeline as we think about our future.

Great. So outstanding 2024, how does that translate into priorities for Zoetis for 2025? And within the guidance that you gave out, what are the key pushes and pulls that you're seeing in this outlook?

Sure. Our priorities remain the same. Our strategy is clear and consistent, and it's to continue to drive innovation forward but also to continue to expand the existing franchises that we have. And when you look at derm, for example, that's been around for over a decade with Apoquel. We still have more medicalized dogs globally that are not treated than that are treated with our products. So we think there's substantial opportunity to continue to expand those. So we're hyper focused on driving those and being the first to leverage our unparalleled data and knowledge of the animal biology to be first to market in areas of excitement. So we're focused on those. And execution has been key for us. Scaling our manufacturing is -- remains a key area of focus for us. We continue to invest in those areas. And that scale has allowed us to be able to launch products and expand those markets through our field force as well. So those are the focus. So when you think about 2025, our multiple sources of growth with our existing franchises is important. We remain in position to take price. As we have -- historically, we've taken 2 to 3 points of price. The last couple of years, we've been north of 4%, sort of closer to 5% in that time. We believe we'll be able to take price above the 2- to 3-year range, even if it's below what we've done in the last couple of years. So those are areas as well that we are focused on driving and executing across the business.

Got it. Maybe digging a bit more into individual products. Let's start with Librela. Clearly, there is -- understandably, there's been an enormous amount of investor focus on this product. Last year, the discussion points around this changed through the course of the year. But now post the wet letter that we posted, can you speak to how the veterinarians are responding to this, to the wet letter, [indiscernible] wet letter and the label change? And are they understanding the product better and how to prescribe and use it in the clinical practice?

Yes. Librela is a very important product for us but we have a portfolio that drives our growth overall, including existing franchises. And we believe and expect those combined key franchise areas to drive double-digit growth for us in 2025. For Librela, specifically, vets remain very positive in terms of their actual experience with the product that has never been an issue for us in terms of as we connect with veterinarians and so forth, finalizing the label, which the FDA has approved now officially drives clarity to your point. And it's actually been a very positive element, including the client information sheets to be able to have that conversation with the pet owner and so on. So it's been met with very positive feedback from vets and very consistent with what we've been saying to them for the last several months in terms of what we expect to happen. And that label is also very consistent with labels that we have elsewhere in other markets. So it's been all positive in terms of getting that finalized and to drive forward with continuing to expand. Just to put into context just the sheer size of the opportunity and how Librela and OA pain in general, if we had Solensia, which by the way, became a blockbuster last year as well. And I know we don't get much questions on Solensia but it's been phenomenal in terms of the growth that we're seeing there as well. But if you roll the tape back in May of 2023, we had an Investor Day and we said we expect our OA pain franchise in 3 to 5 years to be north of $1 billion. And in 2024, we delivered just short of $600 million if you combine those globally. So we're well on our way to delivering that. And if we double click then on the U.S., which I know there's a lot of focus and attention on the U.S., it's been a very successful launch, by the way. If you look at the U.S., we're treating about 1.2 million dogs with Librela. But there are about 8 million being treated with NSAIDs, so a total of 9 million being treated out of an estimated 27 million medicalized dogs that have OA. And so only about 1/3 are being treated and we're only treating a small proportion of those. So if you think about what that means, particularly when you consider the safety profile of Librela versus NSAIDs, we believe there's a tremendous opportunity to go after that 8 million plus those that are not treated at all tend to be leaning more towards those moderate and mild cases and we believe there's a significant opportunity to do that. And when we launched in Europe, about 1 year, 1.5 years after the launch, we were saying that about 40% of those dogs that are getting on Librela were new to the category in terms of being treated. So those were the -- in the case of the U.S., that's the remainder that are not on NSAIDs today. So we couldn't be more pleased in terms of the long-term prospects here, which remain very consistent with what we said back in '23 around what we think the OA pain franchise will mean in terms of the number of years of growth we have ahead.

Got it. That's very helpful context, Wetteny. I think tapping into less than a single -- or single-digit percentage penetration, you're double the global OEM market size in just 2 years.

Yes.

And so I want to parse this down a bit at least in terms of numbers. I think there was a lot of focus around Q4 in terms of the fact that there seem to be no sequential growth between quarter-to-quarter. I wasn't sure if that's the right way to look at it. But maybe at a 2025 size, what -- how have you baked this into your guidance for 2025?

Sure. Look, we issued our guidance in February and we set expectations across those 3 key franchises to grow double digits. And we didn't specifically give one for Librela or any other product for that matter because really, we have these levers that we're using that drive our growth consistently and we saw that last year. In terms of what we are expecting and we try to showcase this in January as well, which is, when we launch new products in markets that we are developing, we are building that market meaningfully different from how treatment -- the treatment paradigm was around using NSAIDs and so forth. That takes time. It takes educating pet owners, educating veterinarians and particularly for a product like Librela that initially goes out to a lot more severe cases that are older pets to begin with, they tend to be closer to end of life and there's more churn and more turnover of those. So if you combine what we said around Cytopoint is, the case that we used in January which showed clearly sequential growth is not a consistent pattern that we've seen when we build markets for the reasons I just said, that is true. But on top of that, the more severe cases that you are treating means that you'll see more variability, more variation when you launch a product like this. And as long as you are more leading on the severe cases, that will be the case. So this is not unexpected, is what I would say. And for that reason, we're not expecting see sequential growth but we expecting annual growth in the product, is the way we frame it, even without sizing that specifically for 2025. And I will not repeat everything I just said about just the sheer size of the opportunity and how excited we are about it long term.

Okay. Great. Maybe on the pipeline side of OA, I mean, you recently mentioned that you are expecting a potential approval for a long-acting OA pain product. So can you provide a bit more details around this and possible time lines for this on the ramp? And when you think about this opportunity of 27 million dogs, what could fit into this category for this long-acting product?

Sure. We're extremely excited about the pipeline as much as we're excited about the existing franchises and how much more room we see to expand there. From a -- when we look ahead, we expect a significant approval each year for the next several years. And these long-acting components of our OA pain are significant approvals and we expect them to incrementally grow the market for us as we think about the 27 million total in the U.S. alone. And by the way, significantly more when you think about globally in terms of that, right? These are monthly injections roughly, right? And if you consider what it takes even the most diligent pet owner, to actually go out to the clinic month after month and then when you think about moderate to mild cases where there could be for years, that clearly shows an opportunity here. And we see that the pet owner is telling us they want more convenience and through that convenience, we'll see better compliance. We see that in terms of the last several years, significantly faster growth in alternative channels that includes retail and home delivery. And it's the same sort of concept here. And so we do believe we'll see substantial incremental growth from the long-acting, although we believe the monthly injections will continue to have a market for various reasons as we look ahead. So we're very excited about being able to drive [indiscernible] therapy and compliance through this convenience for pet owners as the products get approved. I'm not giving any more specificity around the timing of when those approvals will take place nor the launch of those but we do expect a significant approval in a major markets over the several years each year.

Understood. And maybe just a quick question on the competitive side of things. I mean, I've been looking at this company and following the company now from 10 years as an investor and as a sell-side analyst. And clearly, what I've seen that is that you have like a 5- to 7-year lead in terms of innovation or sometimes even more over your closest competitors. And with the current information that you have, insight you have, when do you expect some competitor activity into this space? Obviously, it's a very profitable space [ but monoclonal ].

Right. Look, we go into each area, expect the competition to come. And I think it's a healthy level of sort of competitive anxiety that you want to have. I think what's behind our success over the years in terms of innovation, it starts with something I mentioned briefly earlier, which is our requisite knowledge of the biology of the animal, we believe, is superior in this space and studying and understanding how diseases progress over time is part of that. And when we go after an area of unmet need, we start out first understanding that there is a market and we have a profile of a product we want to be able to launch that will be safe and efficacious. And we want to set the bar at a level, leveraging that knowledge that we have, leveraging our capabilities that is going to be meaningful in terms of setting a new treatment paradigm and new standard of care that even if and when competition comes, I'm not saying it's impossible to sort of beat that profile but it's our goal to put something that, first of all, for the customer and for the impact on the pets and on the animal alone, we want to make sure that it's meaningful. But that same objective drives a product that becomes that much harder to beat, right? And again, I am not saying it's impossible. You could have someone leapfrog us but our aim is to make something that is that impactful, that is that effective. And then when a new competition comes if it's a me-too that is not meaningfully differentiated, you don't see switching happen in this space. And it continues to drive our confidence that these markets remain long, long, long runway to grow and expansion opportunities. So when others come into the space, which I know is a little bit maybe unusual when you think about the context of human health that is far more mature than our space, which is very young, is that when a new product launches, these are not mature spaces where it replaces the existing product. It actually helps to expand more because you have so many more animals that are not treated that they actually put more dollars behind educating pet owners, educating vets and bringing more of those into the fold so everyone gets an opportunity to grow. And because we've been in it longer, it gives us an opportunity to grow even faster than them and benefit from that. So that is our overall premise that we look at. So OA pain is no different. We would expect some competition to come at some point in that space. For derm, we've been expecting competition for a very long time. In fact, we're expecting new approvals in derm, competitive approvals and launches. As you look ahead, we factored those into our thinking in terms of scenarios for 2025 to make sure that we lay those out and what we set expectations with investors for the year. But we've been expecting competition for quite some time in that space. And I think -- I know this is a relatively long answer already but I'll just add 1 more in terms of parasiticides. If you look at what happened in the last 1.5 years, we had the very formidable competitor launch a competitive product against our triple combination Trio. And through the first year, we grew the product 25% and expanded our market share. So I do think our ability, given the expansion opportunities and having very satisfied customers on these products is a really important proof point to look at.

Got it. Great. I think the entry of competitive products into each of your space, be it parasiticides, derm or -- has been an overhang or a key discussion topic over the last 1, 1.5 years. And you commented also upon another competitor product coming in, in derm. So maybe it's a good time to discuss that. So Merck, of course, announced that they are working on a next-generation product in derm. How are you thinking about when this product could come in? And the second part of this question is, of course, Elanco has launched Zenrelia, what are you seeing in terms of initial activities in the field? What kind of feedback are you getting around it? And any change in the strategy at all on the derm side?

Sure. Maybe we'll start, in the last couple of years, you mentioned right and I vividly recall launching our guidance in February of 2023. And the emphasis on competition in parasiticides against Trio specifically and fast forward, that competition has come. And as I said, we've grown and expanded our market share during that time. I think 1 thing that we want to make sure that is appreciated is, these markets are not mature markets. They remain significant more runway to expand as a market leader, particularly when you think about derm, where we have 3 products. One has been around for more than a decade with satisfaction levels that are 90% plus both on safety and efficacy and having a mAb injectable as well as Apoquel and Apoquel Chewable. I think the number of products that are set to meet the needs of our customers here are vast and our satisfaction levels are very high. So we're very confident in our ability to continue to grow in that space as well. But I do think that expectation going back 2 years ago, we have clearly demonstrated an ability to grow through that competition in that there's more room to grow. And I do believe that the emphasis on it and what it means for our business is something that may be a little bit underappreciated is that we expect to continue to grow through those. Now with respect to derm, specifically, you asked, as I mentioned, we are expecting a competitive approval and launch. Here, we factor those into our plan. There's no specificity or in terms of the timing of that. We've baked those into the back half of our year but we'll continue to monitor. And then lastly, until we see the actual label, it's hard to get super tactical on exactly what the levers are, though, as I said, we're very confident given the slate that we have around these products, the fact that we don't see switching unless there's meaningful differentiation and we're not expecting meaningful differentiation here and the fact that we have 3 different products to go after this and more room to expand.

Got it. I have a few questions on parasiticides and the pipeline but I'm going to jump back to the pipeline side of things. Because 2 years ago, we discussed renal, oncology and cardiovascular as newer areas that you're focusing on and you'll get products out into. I haven't seen much on launch side there but I would love to dig into each of these therapeutic segments. Think about what is the market opportunity for you and the potential time line around each of these segments?

Sure. Look, we have recently updated expectations around these very exciting areas that are open-ended, large markets that we're going after. And we provided as much clarity as we're going to in terms of the potential timing of these approvals in major markets and remain very excited. But we also increased significantly in 2 of the areas, the size of what we believe those markets are. So for example, on the renal side, back in 2023, we had that market around $1 billion. We've increased it to between $3 billion to $4 billion. And part of the reason for that is what I said earlier, which is when we go out to endeavor to find a solution for an unmet need, we have a profile in mind that we want to have that is going to be the efficacy and safety profile of those. And as we work through those products, we get closer and closer to what that profile will look like. We have market studies with customers, veterinarians and pet owners around their willingness to pay for that profile and it gives us better sizing of what that market will look like and what they're willing to pay for. And therefore, what is the treatment levels as well. In addition to that, we are seeing advances in diagnostics, in these various areas, particularly in oncology but also in renal. That means you will have that sort of cycle of more diagnosis drive more treatment and a better therapy also drive more diagnostics. And so we believe those components have led to a substantial increase in the size of that market. We also increased the size on oncology for similar reasons, although not as significant a jump from what we said in 2023 to what we're seeing now. And then the cardio area is a little bit further out and it's about the same that we sized it back in 2023. Nonetheless, across the board, we are very excited and we provided more clarity around what is expected in the next 12 months, what's in the 12 to 36 months. And then what is beyond that in terms of the different categories of things that we are going after in our pipeline. We're very excited about those.

Got it. Wetteny with a few minutes left, I do want to touch upon the macro side of things, obviously, I think we can probably set FX aside but everything around tariffs and what it means to businesses which have major export revenues. And what are the other broad macro factors that's going to impact you or potentially could impact you this year?

Sure. Like every other major global company and we have a global supply chain, we continue to monitor those developments, which tend to change quite rapidly as well and what they mean for our business. A couple of things I will remind everyone of with respect to animal health. #1, this is an incredibly resilient industry. It has proven so through various economic cycles in the past. If you go back to 2008, 2009, this is an industry that grew when others did not. And since then, arguably, even more resilient is that, what I would say, we've gone from 2/3 of our business being in livestock, which is essential, obviously, to 2/3 being a companion animal. And the pet owner, not just in the U.S. and Western Europe but across the world, has elevated significantly the value of that pet and what it means to them and being a member of their family and the willingness to spend on that pet, we've seen that play out. And in fact, the last 3 years, every year, we've gone into -- a little bit less so in 2024, I would say but in '22 and '23, for sure, we walked into those years with the same question, which was, what happens in a tight economy where the consumer is under pressure because inflation was going up in 2022 and in 2023 and we were seeing that same questions were coming up. And you've seen what happened during that time. We have also, not only market studies but we've seen it in our actuals, right? We did a market study where we asked pet owners what would happen if you had a 20% reduction in your budget? What would that mean in terms of your spend on pet health? And not only -- well, first of all, the answer was nothing. Interestingly, the cat owners would spend slightly more. I think it was like 0.3%. And the reason that happened is because we actually asked them to show where they would cut back in giving us that answer. So not only is it that they would not reduce where they're spending on pet health, but they showed what areas they would reduce from to make up for that 20%. And we've seen that play out in our numbers over the last 2 or 3 years as well. So we're very confident in terms of the resilience of the industry and then Zoetis, our position in the market, our innovation, our portfolio, the breadth of those and continuing opportunities we see, gives us an opportunity to grow faster than the industry, as you've seen us do time and time again. So I can't 100% predict where the macro is going, where tariffs are going to go but I like our position relative to the rest of our industry and other industries.

Got it. Maybe a quick final question around the margin side of things. I mean clearly, MFA divestiture changes the margin profile for the company. Expand on that. And as we think about margin improvement for 2025 and longer term, what are the pushes and pulls there?

We have consistently driven margin expansion in the business and the pushes and pulls, if you think about the mix shift, is continuing to grow faster companion animal and I talked about the existing franchises in new areas. We do have innovation on the livestock side as well. So I don't want to make it seem like it's the only place. However, we continue to be positioned to drive faster growth in companion animal, which has a higher margin profile. And so that mix shift will benefit us. We continue to see opportunity to take price still above the historical [ 2 to 3 ] as we go into 2025 but below what we did in 2024 and so that tends to drive towards that as well. FX is always a consideration. The dollar and the strength of the dollar has proven to be sort of a headwind when you think about margins, not from an operational perspective but from a reported standpoint. So I would just point at that, there's a little bit of increase in manufacturing costs and so on that offset some of it. But generally, we've added and expanded margins as well. And then last point, the MFA divestiture also helps to expand margins as that was dilutive to our overall margin profile.

Got it. Wetteny, thank you so much for your comments and feedback. Always great to have you at the conference and I do wish you a very productive conference.

Thank you, Balaji.

Thanks for joining us. Yes.

Great.