Zoetis offloads manufacturing sites as CFO embraces activist investors

Last year, Zoetis ($ZTS) vowed to exit 10 manufacturing plants as part of a cost-cutting overhaul, and now the animal health giant is nearly halfway toward meeting that goal. The company has divested a plant in India to Zydus Cadila, an Ahmedabad-based drug company that will also acquire a portfolio of generic products manufactured there, Zoetis said in a Jan. 5 filing. The deal comes just weeks after the company sold two factories in North Carolina and Colorado to Bulgaria-based Huvepharma, which also took over the lease on an Arkansas facility.

Zoetis will receive $29 million from Zydus Cadila. The Huvepharma deal was worth $40 million. The company expects to close both transactions this quarter, according to its public filings.

It's all part of Zoetis' plan to increase its operating profit margin from 25% in 2014 to 34% by 2017--a vow the company made after it came under pressure from activist investor Bill Ackman of Pershing Square Capital. In addition to reducing its manufacturing footprint, Zoetis is eliminating 5,000 SKUs, cutting a quarter of its workforce and focusing its R&D efforts on products that are most likely to deliver the highest returns.

The drive to boost profits is being led by Chief Financial Officer Paul Herendeen, who told The Wall Street Journal that the restructuring program, dubbed "Zoetis Next," will save the company $300 million a year. Herendeen, a veteran of Warner Chilcott, came out of retirement to join Zoetis in August 2014, just two months before Ackman started buying up shares and pressuring the company to either put itself on the block or drastically improve its efficiency.

Herendeen wasn't fazed, he told the WSJ. "There's a role for activist investors keeping management teams on their toes," he said.

Herendeen, who owns two golden retrievers, says he's optimistic about the future of animal health and Zoetis' position in the industry, particularly because it's a cash business with few generic competitors and an easier path to drug approvals than what's typically seen in human healthcare. "You can look out into the next decade or two decades and see growth drivers," he told the WSJ.

The cost-cutting moves already seem to be paying off for Zoetis. In the third quarter, the company's net income rose 14% year over year and the company boosted its expectations for the full year. Zoetis will announce its 2015 earnings results on Feb. 16.

- read the WSJ story here (sub. req.)
- get more on the Zydus Cadila deal at The Economic Times
- access Zoetis' SEC filings on the Huvepharma and Zydus Cadila deals