Zoetis Inc at Bank of America Animal Health Summit (Virtual) Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Michael Ryskin - Bank of America - Analyst : <_ALACRA_META_ABSTRACT>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.

Question: Michael Ryskin - Bank of America - Analyst : 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?

Question: Michael Ryskin - Bank of America - Analyst : 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?

Question: Michael Ryskin - Bank of America - Analyst : 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.

Question: Michael Ryskin - Bank of America - Analyst : 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.

Question: Michael Ryskin - Bank of America - Analyst : 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?

Question: Michael Ryskin - Bank of America - Analyst : 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?

Question: Michael Ryskin - Bank of America - Analyst : 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.

Question: Michael Ryskin - Bank of America - Analyst : 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?

Question: Michael Ryskin - Bank of America - Analyst : Okay. So there's a little bit of a buffer built in or maybe some assumptions around both Zenrelia and the Merck product.

Question: Michael Ryskin - Bank of America - Analyst : 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.

Question: Michael Ryskin - Bank of America - Analyst : 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?

Question: Michael Ryskin - Bank of America - Analyst : 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 REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 27, 2025 / 6:20PM, ZTS.N - Zoetis Inc at Bank of America Animal Health Summit (Virtual) 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?

Question: Michael Ryskin - Bank of America - Analyst : 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? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 27, 2025 / 6:20PM, ZTS.N - Zoetis Inc at Bank of America Animal Health Summit (Virtual) 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.

Question: Michael Ryskin - Bank of America - Analyst : 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?

Question: Michael Ryskin - Bank of America - Analyst : 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?

Question: Michael Ryskin - Bank of America - Analyst : 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.

Question: Michael Ryskin - Bank of America - Analyst : 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.