My name is Brandon Vazquez. I am the covering analyst of Zoetis at William Blair. I am required to tell you to go to williamblair.com for a full list of disclosures and conflicts of interest for the firm. We are excited today to have with us from Zoetis, Wetteny Joseph, the CFO. He's going to run us through somewhat of a brief overview of the company, and then we're gonna do a fireside chat, talking some high-level takeaways, and we'll maybe go a little more granular in the breakout after. With that, I'll let Wetteny take it away.
All right. Thanks, Brandon. Look, for those who may be relatively new to Zoetis or the animal health industry, I'll just spend a few minutes, won't take too much of the Q&A time, just to give you some highlights around our industry and who we are. We are the market leader in a very resilient industry. Our industry has very attractive end markets that have been driven, and continue to be driven by a growing world population that is looking for, increase in demand for animal proteins that drives our livestock business, and then a human-animal bond that has been elevating for several decades now. The importance of pet health, not only in the Western world, in the U.S. and Western Europe, but around the world.
The industry has had and demonstrated an ability to consistently drive stable growth, and in fact, has grown about 5% since 2013, if you look at the CAGR for the industry. This is an industry that has proven to be recession-resistant, being able to grow even in some tougher economic conditions, including the Great Recession, where the industry grew about 2%-3%. Now, Zoetis has repeatedly outperformed that industry, growing about 8% since 2013, which is effectively three full percentage points above the market. Our purpose as a company is to nurture our world and humankind by advancing care for animals. We wanna be the most trusted and valued animal health company, driven by innovation, our customer obsession, as well as our purpose-driven colleagues.
Now, on this page, you can see at a glance that we delivered $8.5 billion in revenues in 2023, which is spread about two-thirds companion animal globally and about one-third livestock. Our products are sold in over 100 countries with about 8 core animal species and 7 major product categories. We have more than 70 years of experience in our industry, with 14,000 colleagues that are really at the core of who we are. Briefly, I'll highlight a few differences that make animal health unique when you compare it to human health. We have faster time to market and less technical risks in R&D. Our drugs get to market faster and are more economically. We have very limited third-party payer dynamics.
In fact, the veterinarian is the key decision-maker and not insurance companies compared to human health. And because of this, you see very limited impact from generics in our industry, and in fact, our brands continue to drive growth and profits decades after patent expiry. And Zoetis has also demonstrated strong financial leadership and strong financial management, which makes us a high-quality growth stock as well. We are a leader in all of the markets that we compete in. We are, we are also the innovative leader in our space, and we are very diversified with multiple sources of growth, and our sound investment decisions have been driving high ROIC for the business. And we've demonstrated an ability to consistently not only drive growth, but also return capital to our shareholders via our dividend as well as share buybacks.
With that, I will come back, and, Brandon, we can go through-
Great.
Q&A.
Yeah, thank you for that overview, Wetteny. Let's start on the companion animal side, and we'll start. You mentioned many of the points that I wanted to hit on, but let's try to get a little more granular on them. One of them that you discussed was that you guys have outperformed the broad animal health market, which is already in a pretty healthy, robust market, by about 3 points. What is it about Zoetis that allows you to consistently do this? I think the last time you disclosed that was almost a decade that you've been outperforming the market.
Yeah, look, I think it starts with our purpose-driven colleagues and the fact that we are fully engaged with our customers on a regular basis across the company. Of course, we have our field force to do that day in and day out, but all the way through our leadership teams and executive team, we're constantly in contact with customers. And what we try to do is to compete for that customer, to be the first to meet their unmet needs and do it with products that are high-quality products with the safety profile and efficacy that we're looking for.
So we start with that end in mind from the very beginning, and we pursue areas that are going to be areas for us to drive and develop a market, and, you know, avoid having programs or projects that are just interesting science projects, if you will. So our commercial teams are engaged from the very beginning in terms of identifying and helping to drive those markets. We then have a disciplined approach in terms of R&D. Our innovation, by the way, does not stop in R&D. It's beyond R&D in terms of our ability to then scale those areas, and we marry up R&D and manufacturing early enough so that we can make sure that when the products come out of R&D, we can scale them and deliver them at a price point that a cash payer generally can afford, as well.
And then commercially, we hand those solutions back in their hands to expand the markets, educating pet owners, educating veterinarians, and driving the market to be much bigger than it was when we came into it. So if you take dermatology, for example, which is one of our biggest franchises, we did over $1.4 billion of revenues in dermatology last year. When our first product launched back, you know, 10, 11 years ago, Apoquel, the market and our expectation was something along the lines of $100 million or so.
And so this is just continuing to do that, and we still see opportunity to grow that market even today, not only in the U.S., where there are still 7 million dogs that should be treated, that are either not treated or undertreated, but outside the U.S., where the markets take even longer to get to their peak sales, we see tremendous opportunity to continue to do that. So I think what I've come to appreciate, in the 3 years I've been with the company, is just that combination of driving innovation through not just R&D, but commercial execution and scaling and manufacturing. Having all three come together is what's driven our success.
Okay, and now that you have a companion animal business that's $6 billion, law of large numbers catches up to everybody at some point. But you guys have reiterated last year at your investor day that you can grow mid- to high-single digits pretty durably. What is it— Is there anything that changes in the playbook as the business gets larger, or is this simply a doubling down of what you guys are already good at?
Look, I think there are so many unmet needs still in our space, despite our success and what you've seen from the industry over the last decade or so, that we still see significant opportunity to drive the business from here. Not only in our current existing franchises and our core products, where we continue to see opportunity to grow. You take parasiticides, for example, that's a $6 billion-$6.5 billion global market to begin with. And Simparica Trio is the latest standard of care in terms of triple combination products. But you still have almost half of the units are collars in terms of number of pets that are treated with collars or topicals.
While the triple combinations are a higher price point, so that drives more than 50% of the market, but there's still tremendous opportunity to continue to drive that end of the market and continue to grow it. And so, dermatology I just spoke about, so I won't, I won't repeat that. We are very excited about our osteoarthritis pain products, which in companion animal, compared to livestock, the animals are living a lot longer. So they develop, diseases like osteoarthritis, pain, and so on. We're just in the early innings, if you will, 3 years or so outside the U.S., within the first 6-8 months of launching in the U.S. And we're very excited about the opportunity here to build yet another billion-dollar franchise in osteoarthritis pain, that will be driving our growth over the next few years.
And on top of that, we have significant lifecycle innovation that we're investing in to continue to drive these markets and then net new markets that we're going after, which we talked about during Investor Day last year. Those include renal, oncology, cardiology, et cetera. If you look at chronic kidney disease, I had the opportunity to go and visit with some veterinarians at the end of last year, and one vet, in particular, pointed and said, "This is one of the most frustrating areas for them to deal with in their practice, is chronic kidney disease," particularly on the cat side, but also on the dog side. So lots of significant opportunity yet to go after, which is why we're confident in our ability to continue to drive mid to high single-digit growth in the business.
Okay. And then, just so that we hit livestock at some point, or I'll forget to bring it up, but livestock is about a third of your revenues today. A lower growth business, but one that you guys remain dedicated to. Just talk a little bit about what are the dynamics there. Why is it a little bit lower growth, and why do you remain committed to it, despite it being a little lower growth and lower margins?
Yeah, look, you know, livestock is an attractive market. It's about a third of our revenues globally. If you look at where livestock is today, it's a business that grows about 2%-4% globally in terms of the industry. And if you look at how we've gotten here, significant productivity that we've been able to drive in livestock over the years. The demand for livestock for animal protein continues to be strong across the world, particularly across the emerging markets. So if you look at population growth, we're expecting to see another 2 billion people on this planet within the next, you know, call it just under 30 years. And the need to continue to drive healthy animal protein is something that's gonna drive that.
Across markets, emerging markets, we're seeing a growing middle class and income levels going up. They're looking to have access more to, again, healthy animal protein that's consistently driving that growth. Now, there are still significant opportunities here. For us, it's continuing to invest in vaccines as preventative solutions to keep animals healthy and more productive. We have immunotherapies that we're pursuing in terms of our R&D pipeline to drive alternatives to antibiotic use. We have vector vaccines and poultry and so on. So we're very excited about the opportunity to continue to drive this business, and there are significant areas of leveraging the same skill set in R&D in terms of understanding the species and the disease states and the biology, et cetera, that we're able to leverage here.
So we do believe that we are the rightful owners for our livestock business, and we'll continue to invest in it to drive it. It also drives significant return on invested capital for us. So we're big on livestock, we'll continue to be.
Okay. And now going back to companion animal, I think in our breakout session, maybe we'll get a little more granular on upcoming competition. But generally speaking, in Zoetis' history, this is a competitive space. What levers do you guys have at Zoetis to defend market share as new competitive entrants come in the market? Talk to us a little bit about, you know, you've clearly had competition in main product lines throughout your history. What do you do in order to defend there?
Yeah, look, the first thing that I look at when it comes to competition is we tend to be in front of the market in terms of new innovation, and that gives us years of experience with veterinarians and pet owners, and satisfaction levels that are really high for our products. So if you look at, for example, Apoquel, which has been in the market for over 10 years, approaching 11 years, the satisfaction level for Apoquel in terms of efficacy is, like, 95% among veterinarians. And so that's, to me, that's the first point, and then the second one is I look at opportunities to be offensive before I look at defensive, and so those markets continue to have opportunities to continue to expand them.
As I said earlier, there's still about 7 million dogs in the U.S. that are undertreated or not treated at all that we can go after, outside the U.S., even more. What we find is, particularly when you have a product that's been in the market for years, and the efficacy and safety record is there, there's very little, sort of switching that happens in our space if someone's not coming out with meaningful differentiation. I stress that word, "meaningful," because there's nuanced things you can argue.
Mm.
You can say that's differentiated, but the reality is it has to be very meaningful to overtake a decade worth of sort of history in terms of efficacy and safety and highly satisfied customers. So those are the things that we do. And then the last thing I would make is, look, we are investing north of $650 million in R&D and driving these franchises to continue to innovate in them. And as the market leader in dermatology, as a market leader in many of the markets that we operate in, we're not ceding any market to anyone. We'll continue to drive innovation in those spaces and defend them as well. And you've seen that play out, for example, with Simparica Trio. Trio's been out for since April 2020.
We had about a 3.5-year head start before the next player came in, in the U.S. that is, with a triple combination, and since then, 3 quarters straight, we're posting increases in our market share, patient share, with Trio, with head-to-head competition, in that space. Again, these are the type of things that we'll continue to drive, with the business.
Okay, and maybe, maybe last high level, we should touch on the P&L a little bit. You guys have done a great... At your Investor Day, you also talked about this. Over the years, you've grown your operating margins to high 30%. I think we're calling it 38%, roughly around there today. But one question we often get is, if you—what's the algorithm for EPS growth from here? Are you topped out at operating margin growth, essentially at this point, given it's already very strong? So, you know, talk to us a little bit about the algorithm. What, what opportunities are there left in this P&L in the long term for margin expansion?
Look, we see significant opportunity. If you look at, you know, companion animal, because they live longer, there are lots more opportunities to go and have meaningful innovation in those spaces, and we see the secular tailwinds for companion animal being even faster than livestock that we've seen over the years, and we see that continuing. So while a companion animal is about two-thirds of the business today, in the U.S., it's approaching 80% of the business, and outside the U.S., just in the time that I've been with Zoetis, in the 3 years, we went from companion animal being just under 50% in the international business to being just over 50% across international. So the rest of the world is moving in the direction that the U.S. has, which more companion animal, which has a higher margin profile than livestock.
So, just that mix alone is going to drive it, and then the innovation that we're driving with the mAbs for OA pain and other areas, oncology, renal, et cetera, that I described earlier, are all in the companion animal space. Now, we are also innovating in livestock, as I mentioned, but these areas are going to continue to outpace that growth, and that mix will continue to contribute toward expansion of gross margins. We're able to leverage our scale in terms of we see it in the guidance that we gave this year. We're leveraging SG&A spend significantly in driving margin expansion in the current year. We think there's more opportunity to continue to do that going forward.
Okay, maybe a little bit more recent events, maybe somewhat high level still, but recent events. You know, a lot of us look at vet visit volumes in the space. It's something that's been compressed ever since what have been seemingly difficult comps in the big COVID puppy booms in 2020 and 2021. I guess you know the first question is: what do you guys think is happening here from your view? You obviously have a good pulse on the companion animal market. Why are we going into our third year of decelerating comp or vet visits here? And then the follow-up is, how do you consistently continue to outperform that, right? Your stock kind of trades off into the quarter as everyone gets vet visit volumes. You do better, and then we do it again next quarter.
Yeah.
What is it that you're doing that's allowing you to outperform?
Well, the one thing we've consistently done is, even in the face of decreasing overall vet clinic visits, you're seeing us posting growth rates, not just in price, but volume growth in the U.S. And so, you know, at some point, I'd like to see that be sort of perhaps better recognized. And we think there are some real important reasons. If you double-click on vet visits, what you'll see is therapeutic visits that continue to grow. You're not seeing declines in therapeutic visits. Our business is more tied to therapeutics, right?
Mm.
Versus wellness visits that might see some headwind. There's not much outside of diagnostics, a bit of wellness visits, that we're tied to, so that tends to drive our business more than the overall numbers. So you have to double-click and see what's happening with therapeutics overall. The second thing is you have alternative channels that are increasing a proportion of our business. So whether you look at retail, online, brick-and-mortar, et cetera, those have been outpacing the overall growth. So since 2019, where these alternative channels were about 5% of our companion animal business, companion animal has grown significantly since then... and yet, we're now at about 13% of our business going through those channels, despite the massive growth you've seen in companion animal.
So it's outpacing, and it's been growing in the 25%-35% range almost every quarter since I joined the company, and those are not really reflected in those, in those vet visit numbers. Although you do require a veterinary prescription to get those products, they're just not fully reflective in those visits. So I think the combination of those two things is why you continue to see us drive growth despite some headwind in terms of overall visits, even though therapeutics visits remain strong.
Okay. Do you have any sense of when wellness visits may turn back around and also support that?
Look, I'm not going to completely speculate on. I do think the core of this is not an end market demand challenge as much as it is a capacity in the vet clinic. So if you have to pick and choose between a chronic condition with a particular animal versus a wellness visit, you're gonna bring in the one that has a chronic condition, and so we see that playing out, if you look at how long it takes to get an appointment into a clinic, et cetera. I had the opportunity to sit down with a very senior person from a large corporate organization that owned thousands of clinics around the U.S., and in 2023, when overall visits were down about 1.5%, they were up 2.5%.
The reason was because they have a formula for making sure that a veterinarian has what they call 65% of their time hands on the animal, and so they're, they're really scheduling and staffing in a way to enable the vet to do that. By doing so, they're able to get more throughput through the clinic, and they saw that 2.5% increase through November 2023. I think, I think this is clearly demonstrating that the, the underlying demand is there, even with wellness visits, I would say, although clearly there could be some times when someone would delay a visit or what have you, and it's more difficult to get an appointment. Overall, the, the demand profile is very healthy in the U.S. and across most of the markets that we're looking at.
Okay, and let's maybe spend a couple minutes on Q1 specifically, since Q1, you know, was a good, strong quarter for you guys ahead of expectations. I'm gonna lead the question a little bit here, but what was most telling to us, contrary to 2023, was that Companion Animal drove the biggest part of the beat rather than Livestock. So you had that kind of flip. That was encouraging. What are you seeing in Companion Animal that was so strong? And, you know, which segments would you call out there, and what does that mean for the rest of the year in those specific segments?
Look, I think there were a number of areas that were really strong, and it was an outstanding quarter, 12% operational growth on the quarter. Now, as you said, last year, Q1, we had a very robust livestock quarter, 12%, so we're up against that comp, and so the mix is different, where companion animal had a softer comp because of some destocking in the prior year. When we neutralize those, you still have a very high single-digit growth in companion animal globally, in the U.S., a double-digit growth for companion animals. So really, if you look at the performance with dermatology, they grew 25% globally. That's a big driver. Trio, as I mentioned earlier, head-to-head competition for triple combination, and Trio grew 61% in the U.S., 58% outside the U.S. as well. So globally, Trio grew...
was outstanding quarter. And then our OA pain franchise delivering $130 million of revenue, with Librela having $100 million of that, just over $40 million in the U.S., $60 million outside the U.S. 189% growth, even if you take the U.S. out of that mix, international grew seventy-something%. So, so I think those three areas were the biggest drivers to the growth that we saw. And, and we, we raised guidance after just one quarter, which is really signaling our confidence and continued momentum into the second quarter from what we saw in the first quarter. So we couldn't be more pleased with the performance in the first quarter and, and pleased to be able and positioned to, to raise guidance.
Okay, and on those... So you have those three buckets, and granted, yes, there was easy comps year-over-year, but still really good momentum and ahead of expectations. To be clear, doesn't sound like there was any kind of bulk ordering or anything like that going on there. This just seems like there's pretty solid momentum, which is what gave you confidence, in part, to raise guidance for the full year on the organic growth side.
Yeah, that's right. I mean, if you look at, we're still launching the product, you know, Librela in the U.S., so clearly, that, that's continuing to ramp. There's very little to no stocking in that number, as we said, because we had such high penetration in the fourth quarter, north of 60%. The incremental, you know, percentage to get to 70% isn't enough to move the needle from a stocking perspective, so no stocking to speak of. And overall, if you look at stocking across distribution channels, they've been relatively in relative terms, towards the low end of the range since Q1 last year.
Okay.
We haven't seen any movement there. So really strong underlying demand right through to the end customer is what we're seeing across the business there.
Okay, and maybe let's spend a minute on Librela, because this is such a key part of the growth story in the next 3-5 years, probably, right? Your next billion-dollar franchise. When we do kind of our surveys and we talk to any vets, this is a great product, and we find a lot of good customer reviews. But of course, there's been negative headlines that, you know, this isn't a secret, whether it's Wall Street Journal or other media outlets. Where are you guys hearing from vets? I think at the end of the day, the vets seem to be the most important person recommending this, right?
Are vets seeing any of this noise, and are they taking a step back at all, or you know, talk to us about what you're seeing from the vets, given the noise that we're hearing?
Yeah, the short answer is no. Vets are not stepping back at all in terms of their intent to use the product or prescribe the product, et cetera. And look, you can see it in our numbers in terms of the growth that you're seeing in Librela in the U.S. This is why we took the time to share the data point around if you look at a rolling four-week basis, through April, when we gave guidance, and through May now, as Kristin talked about last week, but we continue to see a steady increase in demand for Librela in the U.S. Now we're well past the headlines in terms of some of the misinformation that we've seen here. So we're very pleased with that.
But to your point, it is the vet that is at the core of this, and that's the center of this, right? The veterinarian is able to understand the science and the data, and as we've been very transparent with them, we have doubled down on making sure they're educated on, on those facts. They're able to have the right conversation with the pet owner, by the way, whose trust they have for caring for that animal, probably for some time before this, to be able to articulate why they still believe this is the right solution for a dog that's suffering from osteoarthritis pain, or a cat, for that matter, with Solensia, and continue to drive the demand that we, that we've seen and we continue to see through the month of May here. So we're very pleased with that.
We've done survey after survey gauging that, by the way, with veterinarians. Up until within the last couple of weeks even, we continue to see consistent intention to prescribe the product and, and use it, and again, we're seeing it in the revenues as well.
Okay, great. And, maybe one last one on Librela is basically, as we think in the future, for this to be a billion-dollar franchise, what needs to happen commercially? What levels of penetration do you think you guys need to see in order for this to reach its, that potential?
Look, as we said during Investor Day, the combination of Librela and Solensia, we expect to be north of $1 billion in revenues in the, what I call the initial peak sales, because these are areas that will continue to grow. Our initial peak sales expectations for Apoquel is something like $100 million or so initially, so we're at $1.4 billion. So clearly, there are opportunities to continue to expand those markets. And what needs to happen is actually what's actually happening already. So let me give you a few data points. As I said, this first quarter was $131 million or so of revenue between those two products in a quarter.
And if you look at what's happening outside the U.S., in international markets that have been around for just over three years, we're already seeing the penetration of Librela well into moderate and mild cases. And so, the latest surveys we've done across European veterinary practices indicates that over 50% of the dogs they're treating with Librela now are moderate cases, and then some additional percentage in mild cases. So now the majority are in between moderate and mild, which is important in terms of those that are gonna be on muscle therapy, are gonna continue to increase, which are now between 7 and 8 months. These are the elements that we factored into our thinking around the size of the opportunity, and we continue to see a climb in terms of...
Now, these, these are first line of treatment for veterinarians around OA pain, etc. All the dynamics that we expected to see, we are seeing there. Now, the U.S. is still relatively early, but as I said, the intent to prescribe and the data and the ordering that we're seeing continue to support this, and we remain very confident in our ability to get this franchise to that $1 billion-plus range in the 3-5-year time frame we set.
Great. With the last two minutes here, I think, you know, one question following last quarter, you did raise the organic guidance range, I think, by about 1.75 points. I had gotten a lot of questions around how much of that is price, how much of that is volume. Maybe just walk us through, so that, you know, we can all level set in that increased guidance, how much of it basically is coming from volume versus price?
Look, we didn't get to that level of specificity around the guidance. I think, given, you know, the strength we see in the business and with the results you saw, 12% operational growth, when we gave guidance of 7%-9% to start the year, and continued momentum that we saw, we raised guidance a full point and a half just after one quarter, and we continue to drive the business in that direction. So we're very happy to have been able to do that.
Now, you saw a healthy contribution from price in the first quarter, about 5% or so, and I think some of that, though, is on the livestock side, given some of the hyperinflationary markets, where we were able to take price a little bit more aggressively in those markets to counter the effect that you're seeing in those places. On the companion animal side, the price piece is about where we expected coming into the year. We'll continue to report on those as we look forward. But you've seen a good balance between price and volume. In fact, Q1, even if you took Argentina out of the mix, and I'm the first one that said Argentina on this Fireside Chat.
But even if you take it out of the mix, you had 10% growth operationally, which is 5 and 5, price and volume. Now, because of the destocking that happened in Q1 last year, that gives you a little bit of tailwind on volume in the first quarter, so you might see a little bit more price versus volume, but still healthy volume in the business is what I'm expecting the rest of the year.
Okay. And I guess the, to sum that question up is, it does sound like, to be clear, that there was some incremental volume from companion animal baked into the increased guidance, or is that not fair to... Can we not conclude that from what you were saying?
I'm not going to get-
Okay
...that, the details of incremental versus what you saw in the first quarter.
Okay.
Again, I think Q1 had a little bit of tailwind from volume because you're up against a comp in the prior year where volume was hit hard-
Okay
... from destocking. So if you take that out, then you would've had a little bit more price than volume in Q1 to begin with, right?
Okay.
So that's the clarification I'll give you.
Okay.
I'm continuing to expect volume growth. Again, Trio's performing exceptionally well. Clearly, the OA pain franchise continuing to perform well for us, derm, etc. Those will have both price and volume components to them.
Okay. Great, well, that's time. We're gonna head to the breakout room, and I'm sure probably ask that same question 20 different times. So, we are going to do-