Ann Berry (00:00):
The pet industry has grown consistently for a decade and may reach a global market size of half a trillion dollars by 2032 as a result. So why is that? Well, a couple of things going on. First of all, companion purchases, meaning buying pets exploded during those lonely days of covid. And also we've seen a longer time trend of humanizing our pets, which means treating our furry friends like human members of our family. So as a retail investor, how can you play with these tailwinds? Well, there are a couple of public companies out there in the pet insurance, pet food, pet store space brands at are top of mind like Petco and Chewy and Trupanion, but there's a nearly $8 billion market cap business with roughly $9 billion in annual revenue that touches the pet space, an important stock he may not have been paying as much attention to. And that is Zoetis spun out of pharmaceutical giant Pfizer in 2013. This animal health leader reported earnings on November 4th, and we're very excited to welcome a breakdown, what's going on here with Chief Financial Officer Wetteny, Joseph. Wetteny, let's start with just with the basics. Tell us, give us your snapshot view on what Zoetis does.
Wetteny Joseph (01:04):
So I think what's maybe the best way to boil it down is we are the leader in animal health. What does that mean? We come in every day, we have 14,000 colleagues around the world, and our sole focus 100% is dedicated to making animals healthier around the world. We are well known I think, for the pet care side of the house. And so we're keeping the cats and dogs and horses actually comparing animals healthy through predicting potential illnesses, detecting them, preventing them, as well as treating them. So across that broad spectrum, we're working on products and solutions to do that. We're maybe lesser known for what used to be two thirds of our business, but is now about one third, which is production animals. And so we are keeping those animals healthy as well, whether it's the cattle that becomes the steaks that we eat or poultry or pork or even fish in some markets, we are helping to keep them healthy as well. So if you drink a glass of milk, eight piece of cheese, had a hamburger or chicken sandwich and so on, chances are we and others in our space are keeping those animals healthy as well.
Ann Berry (02:10):
Wetteny, let's start with the split of your business. Give us a little bit more color on the slightly larger piece of Zoetis, which is a companion animal space. You've got a pretty broad product portfolio. Talk to us about some of the hero products you have within that specific portfolio.
Wetteny Joseph (02:27):
Yes, we have the broadest, deepest enduring product portfolio in our industry. We have 300 product lines and we have more blockbusters than anyone else in our space. Accounting 15 blockbusters and animal health blockbusters considered $100 million in revenues and we actually have 2 billion franchises within our product slate and a third one on its way. So the human animal has actually caused the companion animal side of the business to grow much faster than the overall industry. And for us it has become, it was one third of our business about a decade or so ago when we spun from Pfizer, as you mentioned earlier, to now being two thirds of our business and for the foreseeable future, we see that growing faster than the lifecycle side of the business. So within that you will have products like Parasiticide on the pet care side. So dogs cast, they will have parasites, even heartworm, which is actually deadly and it's prevalent throughout the US and other markets in Europe and Australia for example.
(03:37)
And so heartworm protection is incredibly important for pets around the world and we're producing lots of products to make sure that we are preventing those items for them. And then there are vaccines as well that also again keeps them healthy. And then we have the developed chronic conditions. They're actually over the decades, they're getting better care. 95% of pet owners consider their pet as a member of their family. What does that mean? That means they're living healthier lives because we're innovating to keep them healthy as well and they're living longer and therefore they're developing certain chronic conditions. And so if you look at dermatology for example, we have built that market from what was about $70 million, call it a decade ago to more than $1.5 billion. And we have more than a 95% market share in that space. Osteoarthritis, pain, again, the same things we have as humans. As we get older, we begin to develop those still do animals and we have our next billion dollar franchise is in that space and we are revolutionizing that space with new products, Ella for dogs and then lencia for cats that we launched in Europe about three years ago and in the US one year ago. And those continue to drive our growth. So this just a sample of the different types of products that we're bringing to market on the pet care side. And then on the livestock side is vaccines is preventatives as well.
Ann Berry (05:06):
Wetteny, as you talk about this shift towards treating our pets like human members of our family, let's talk a little bit about some of the recent blockbuster drug developments for humans and ask ourselves in SQ whether we can see those being applied to pets down the line. So let's take the GLP product line, right? Obesity management. Is there a day where we could see Zoetis producing GLP for pets?
Wetteny Joseph (05:32):
So perhaps we're ahead of our time. I think it's been almost eight years ago or nine years ago that we actually had a weight loss drug for pets and we were ahead of our time, well before GLP once. It was not a GLP one based product either, but customers and pet parents didn't see obesity as a condition they needed to treat. They felt that it was actually getting in the way of what is their expression of their love for their animal, which is giving 'em treats and giving 'em food and so on. And they didn't think that it was an item they needed to. But we've done the market research and there's roughly half to two thirds depending on the different species, cats versus dogs that actually are technically overweight or obese. And so there is a potential market there. How we get to it may or may not be through GLP ones.
Ann Berry (06:22):
Let's continue to talk a little bit more about the companion animal side. There's a lot to cover wet, but there's some news related to the pain management side of your business and in the earnings call that you all have, there were questions about Libre specifically. There has been a European commission investigation into Zoetis around the go-to-market strategy for this drug. Just give us the update on where that stands right now.
Wetteny Joseph (06:47):
Yeah, so first we delivered an excellent third quarter and overall on a year to date basis, we've actually delivered 12% operational growth. And by the way, operational just means on a constant currency basis at the top line and 17% operational growth at the bottom line on a year to date basis. So it was 14 and 15 on the third quarter, couldn't be happier with the performance of the business across the board, across markets and so on. OA pain is, as I mentioned earlier, our next potential billion franchise. And just to put in the context for a second and then I'll get to the more specific part of the question is that there are about 86 million in the US and about just over 60 million cats. And the prevalence rate for OA is approximately 40%. So the size of the market is quite phenomenal. Now from a medicalization rate perspective, about 75% of dogs actually see a vet on a regular basis.
(07:41)
So you start to sort of hone in on what the addressable market is, but it is quite large. Only about 9 million are getting treatment today in the US we are treating 1 million in the US with Ella and about 8 million are still on NSAIDs. And the safety profile of NSAIDs is something that we believe truly we needed to do something about to bring an alternative solution, which is revolutionary. And we really have seen quite an uptake on re so far in the first three years starting in Europe and then now in the us. We launched about a year ago and we're very pleased with the performance. It's actually been the most successful launch we've ever had in our history, including the other billion dollar franchises that we have. So clearly a phenomenal start. The EC investigation that you mentioned is not Libre. It is a initial exploratory drug candidate that we did purchase through an acquisition. We actually spent further dollars to investigate that product and we bumped into some challenges, quite frankly that cause us to halt development of that drug. And so the acquisition as well as the eventual succession of work on it, we believe completely just and we feel confident about the decisions that we made and what the outcome of this will be, but we'll go through and cooperate with the EEC through that investigation.
Ann Berry (09:04):
Let's shift gears a little bit, Wetteny. Let's talk about the other side of your business, which is on the livestock side, lots of enthusiasm clearly about the companion pet side, but let's talk about livestock. Talk us a little bit about the profit margin of that side of your business. How does the profit margin there compare to the pet side of the business?
Wetteny Joseph (09:26):
Well, if you look at the Zoetis financials and p and l, you'll see that our EBITDA is actually north of 40%. So this is a profitable business that we continue to redeploy into and continue to drive innovation in our space. So we're very pleased with that. While we don't bifurcate the profitability of the two sides of the business in terms of our external reporting, what I can share with you is that they're both very profitable and that we continue to invest in solutions that will continue to drive innovation in both of those spaces. Livestock, as I mentioned earlier, you have species including cattle, swine, pork, poultry, even fish. You may have seen that our fish portfolio grew 26% on the quarter. We've been very pleased with how that side of the business has been going as the rest of the business, I would say we are working on preventatives vaccines as well as immunotherapies that could actually be alternatives to using antibiotics, particularly antibiotics that are critical to human on the human side. So we are very, very pleased with the investments that we're making in that business. Again, it's very profitable. There are some commonalities, synergies I would say, in terms of understanding the biology of the animals, how diseases progress and so forth. And the capabilities that we have within r and D are shared in that way. And so it drives those for us. It is a business that is generating a lot of free cashflow for us,
Ann Berry (10:52):
Driving the cash cow literally when there's so many plugs we could use.
Wetteny Joseph (10:55):
I was trying not to actually see it, but it is a business that generates significant cashflow. Us as well.
Ann Berry (11:03):
Let's take a look about the macro tailwinds or headwinds facing the livestock space. You led at the beginning and said if you've eaten a hamburger, if you've had a chicken sandwich, there's some chance that Zoetis has touched those product categories. Consumer trends, at least in the west are tending now towards or have been for some time meat replacement. There's also been climate questions, I think it's Cals are one of the biggest contributors of global warming in the aggregate. When you take a step back and look at those trends, do you see risk for the livestock part of your business?
Wetteny Joseph (11:37):
We actually see a lot of opportunity in the livestock business. So let me sort of step back and give you a little bit of the reasons why I mentioned a strong secular support for both sides of our business and livestock. It's a combination of population growth. And so if you look at the data, we have about 8 billion people walking the earth today that's expected to be closer to 10 billion by 2050. And so in the next call it 25 years or so, we'll have 2 billion more mouse to feed around the world and you're going to need more healthy animal proteins to do that. So number one sort of condition as driving that across the world, you are seeing increasing middle class in emerging markets in particular who are, as that happens, their additional income levels actually drives more consumption actually of healthy animal proteins. And then you see more urbanization and as people move into the cities and so on, that drives the need to again continue to sustain production and productivity out of those as well.
(12:39)
And so to pivot to your point about alternatives to animal proteins, as we watch the data, you actually see a declining use of those. I think there's always going to be some space for that, but as I just mentioned, there are actually bigger macro trends that are going to actually continue to drive animal proteins forward. And then on the sustainability front, we're very proud of the work that we're doing on this space. I think what is perhaps slightly misunderstood is the best way to limit the impact on the environment is to make sure that the animals are healthier and they're more productive. Healthy animals actually produce less methane and they're more productive, and therefore you can actually feed the world with fewer of them in essence than you would if they weren't healthy or you're losing more of them, right? And so if you look at the data historically, what did it take to produce the amount of milk, for example, that is consumed around the world or in the US you would see a declining number of dairy cattle that you need because you actually are genetics data is helping to select and have more data to understand how best to drive productivity of dairy cattle.
(13:48)
So over time, relatively speaking, you see fewer dairy cattle to produce the same amount of milk if you will over a decade. So that's an example of the impact we are making on sustainability and we think that's the primary answer as we look ahead.
Ann Berry (14:02):
A lot of the demographic trends that you just outlined, Wetteny, are more applicable to markets outside of the United States. So just take us very quickly through what's going on with your international revenue. What proportion of the business is that today and which particular pockets of the international market do you foresee growing?
Wetteny Joseph (14:18):
Sure. Look, I think our revenues almost 50 50 US versus international. International is slightly below 50%, but call it 50% of our business. The trend that we're seeing in terms of the human animal bond and what that's doing for companion animal is also happening outside of the us.
Ann Berry (14:34):
Let's touch on r and d. Wetteny, you said at the beginning that there has been investment in r and d or expenses were up 10% year over year. Talk to us about the top three r and d priorities for Zoetis right now,
Wetteny Joseph (14:45):
We have been increasing our spend in r and d. It typically is running around seven to 8% of our revenues on an annual basis. So we are spending roughly $650 million a year. If you go back from the time of the spin and the IPO to now we're north of 6 billion spent. I think the diversity of where we're spending reflects the diversity of the product portfolio that we have. I think one thing to appreciate is if you look at our space, products that have been launched for decades even continue to have significant runway. As we continue to grow and expand the market, we're adding additional claims that are helpful and we actually get paid for those incremental innovation. So we have a combination of focus on new areas that we're targeting and really spending dollars to continue to drive meaningful innovation in those spaces that become the new standard of care in those spaces.
(15:36)
But we're also spending in products, believe it or not, they've been in the portfolio for quite some time to continue to add additional claims, get them into different markets around the world. So geo expansion of those as well as and so on that actually continue to drive our growth even decades after they were launched. And so the spend tends to be a little bit 50 50. I know you asked about specific products. If you look at new categories that we're really, really excited about as we look at the future renal, including chronic kidney disease, estimated 10 million dogs and cats that suffer from renal. And I have personally been out to visit clinics and talk to veterinarians and they describe this as the most frustrating disease state for them to deal with because they don't have any real good solutions here. So as an animal health company who wakes up every day entirely focused on advancing animal care, it really touches us and we are really working in that area to potentially bring some meaningful solutions here in the future.
(16:39)
Oncology is another one that we're focusing on as well as cardiology. So these are categories that we are spending dollars that will be net new innovation that will transform spaces that really have significant unmet need. But we're also spending in areas like OA pain for example. Even though we have relatively new products in that category, we're actually looking at lifecycle innovations that are actually going to be able to have longer acting components of those. So in dermatology, we've been in that space for a decade. We have the largest market share in that space. We continue to invest in long acting formulations for those. We recently, actually within the last year in the us within the last two years international in Europe, we actually launched Apoquel chewable. Most people who know Zoetis know that we're associated with Apoquel, but a decade later we have a chewable version that you can just give to your pet as a treat and it actually has the same efficacy and safety profiles, Apoquel, that is meaningfully driving that because it's more convenient and it should drive even more compliance with the product.
Ann Berry (17:41):
And talk to us about AI and use of AI in your innovation process.
Wetteny Joseph (17:45):
Absolutely. We have actually been using AI for the last few years in that are customer facing as well as through our r and d and other parts of the company. We're very proud of that. I mentioned we are working on areas that are going to predict, prevent, detect, and treat. So when you think about predictional detection, actually in terms of diagnostics, we do a lot of work there. We're very proud of having the first platform that actually uses AI where you can take a sample in the clinic, put it under the slide, and it actually plugs into the AI engine that's going to analyze it and tell you while the patient is still in your clinic if they have a certain parasite or some other disease state to address. And so it changes the paradigm quite a bit actually in terms of the interaction between the vet and the pet owner that you don't have to wait until they go home and then call 'em in a couple of days.
(18:36)
You can actually get the results right then and there. So that's been leveraging in ai. It's been out there for about three years now as an example, but we are really excited about the future. I mentioned earlier our knowledge of the biology of different animals and how diseases progress over time is a treasure trove of data that we have that is unique to us. Genetics, for example, I mentioned that we're doing. So when you think about the power of using AI and putting that up against not only externally available data, marrying that with our own proprietary data that we have in house and using that to help fast track the drug discovery, identifying targets that can solve a problem, or even if you've completed a clinical trial, the time that it takes to take that information, summarize it into a filing that you're going to put forth to the regulatory agencies is measured in months, almost a year even. You can fast track that using ai. So we're very excited about these, what we're calling golden use cases on the r and d side in terms of how we're going to continue to leverage ai.
Ann Berry (19:39):
And does this mean that AI can be used to displace animal testing? Wetteny, is AI what you guys refer to in your filings as alternative testing?
Wetteny Joseph (19:48):
Look, I think this is something that we're really focused on. It is a requirement, by the way, from a regulatory perspective that we use animal testing in certain parts of our work. It actually is one of the elements that makes the risk profile of our business even lower than if you think about human health because you're actually doing the testing in the same species that you are actually going to be targeting for a solution for and treat. So it is our objective to make animals healthier. So we want to reduce the number of animals that are actually used in testing, but it is mandated that we do and we continue to work with regulatory agencies to reduce the use of those, but our mandate is actually to provide solutions actually in that realm.
Ann Berry (20:30):
Wetteny, we're almost out of time, but just one last question for you. Let's go back to the earnings. As you said at the top, very strong performance by Zoetis outperforming versus expectations on the revenue side. On the earnings per share side, share price did close down nonetheless. If you had one message to investors right now, what are they missing? What are they missing? If your share price is down, despite very strong earnings and outperformance, what is the message you would leave investors with?
Wetteny Joseph (20:58):
I think the one thing that I would say is if you look at our diverse portfolio, and if you look at the big franchises that we have built at Zoetis, they are very durable. And the growth potential of these, even franchises we've been in for a decade, is still quite substantial. So we're very excited about the entire portfolio and the time that has taken us to build these and to become the standard of care for these disease states and therapeutic areas means that someone has to come in with meaningfully differentiated products to actually take us off of our number one spot and we continue to invest in r and d to continue to move the ball forward. So I think that is the number one thing. We remain very committed to OA Pain becoming our next billion dollar franchise. That will take its time to build and it'll be just like we have in Durham and Parasiticide and continue to drive our company in the future and the growth and profitability that investors have come to enjoy from us.
Ann Berry (21:58):
Wetteny Joseph, chief Financial Officer of Zoetis, thank you so much for joining that zip. Folks, join us again for after earnings, a show that brings you up, place and personal with some of the most interesting public companies out there.