Embattled Zoetis courts investors as activist shareholder Ackman looms

Just after Zoetis ($ZTS) kicked off its first-ever Investor Day at the New York Stock Exchange on Tuesday, the Twitterverse came alive with reported sightings at the meeting of Pershing Square's William Ackman, who recently purchased $1.5 billion worth of the company's shares, reportedly with the goal of pressuring the company to put itself up for sale. Then, as if Ackman's presence wasn't nerve-wracking enough for the Zoetis executives who were presenting, trading in the company's stock was halted unexpectedly midday, when its financial forecasts were released earlier than the company had planned.

Once trading resumed, Zoetis's stock took a dip as Wall Street absorbed the news that the animal health giant's performance would not live up to expectations. The company said it predicts 2015 earnings per share will come in between $1.61 and $1.68, up from $1.53 this year, and that sales should grow between 6.5% and 8.5% minus the impact of foreign exchange rates, totaling $4.85 billion to $4.95 billion. Analysts on average were hoping for $4.96 billion in sales and EPS of $1.71, according to estimates compiled by Investor's Business Daily.

Prior to the meeting, Ackman spoke at a private session with investors, during which he griped that Zoetis's costs were higher than those of other animal health companies, according to anonymous sources cited by Bloomberg. Pershing Square and Sachem Head Capital Management have worked together to build a 10% stake in Zoetis. Although they haven't disclosed their plans, Ackman has become famous for harassing companies into M&A transactions--most recently helping to push Allergan ($AGN) into a $66 billion merger with Actavis ($ACT).

Even before Investor Day, Zoetis's execs seemed to be doing everything they could to make a strong case that the company should remain independent. Late Friday, Zoetis adopted a one-year shareholder rights plan--a poison pill--likely to deflect a hostile takeover orchestrated by Ackman. Early Monday, Zoetis announced that it would pay $255 million to acquire Abbott's ($ABT) animal health assets, which include a portfolio of veterinary surgical tools. Zoetis also unveiled a $500 million share buyback program.

Zoetis CEO Juan Ramón Alaix

Zoetis CEO Juan Ramón Alaix kicked off the event with an enthusiastic overview of the rapidly growing animal health business--and an impassioned reassurance that his company could maintain its position as the No. 1 player. The stats he presented were compelling: Animal health is a $23 billion market expected to exceed $33 billion by 2020. Exploding worldwide demand for quality meat will drive up to 2% growth in the population of livestock and poultry annually by 2023. About 62% of American households own a cat or dog, and spending on companion animals in Brazil, Russia, and China is growing more than 15% a year. The list went on.

"The animal health industry is a very attractive industry with trends that will support steady and predictable growth in the future," Alaix told the audience of analysts and investors.

Still, Zoetis has faced some tough challenges. After it introduced its anti-itch product for dogs, Apoquel, earlier this year, for example, demand was so high the company couldn't keep up, and veterinarians all over the country complained about the resulting shortage. The company is now making manufacturing improvements and it predicts the shortage will end in the spring of next year.

Alaix admitted that Zoetis is "under-represented" in companion animals--a shortcoming he attributed largely to the company's absence in the emerging market for oral drugs to prevent fleas, ticks, heartworm, and other parasites. Rivals Sanofi ($SNY) and Merck ($MRK) have rolled out chewable flea-and-tick fighters this year, and early sales indicate that pet owners are embracing the products.

Catherine Knupp

A bit of good news on the anti-parasiticide front was delivered later in the Investor Day presentation by Catherine Knupp, Zoetis' president of research and development. Knupp told the audience Zoetis had completed a key FDA filing that would allow it to embark on a development program for Sarolaner, its investigational oral flea-and-tick medication. If all goes well, she said, Zoetis will be a player in that market in 2016.

After the presentations, FierceAnimalHealth asked Knupp to explain how the drug might overcome the obstacle of being so late to market. She declined to provide details about the compound, though she did strongly indicate that convenience would be a big selling point.

"You have fleas, ticks, heartworm, and then you have all of the intestinal parasites. The ideal spectrum of activity would include all four components," Knupp told FierceAnimalHealth. "So the concept is to offer a one-stop shop. But not all components of the market need that all the time. For example, in the southern part of the U.S. you're going to want that coverage all year round. In northern parts of the country perhaps you can be more selective. The notion is to address all of those needs in a single product, but then to also make sure you have the offerings for components of that market."

Much of the Investor Day event centered around educating the investment community about the potential for Zoetis to expand its overseas presence. Examples of how the company is making its brand known through the animal care world abounded, including one particularly colorful anecdote relayed by Joyce Lee, area president for Canada and Latin America. Zoetis, she said, has been sponsoring a run in Buenos Aires for dog owners, all of whom must agree upon registration to bring their dogs in for veterinary checkups prior to entering the race. The number of participants grew from 3,000 in 2013 to 5,000 this year. "This is an example of how we're bringing pet owners and veterinarians closer together," Lee said.

Perhaps, but the investment community seems to need a little more convincing that Zoetis can indeed thrive as an independent company. After Investor Day, shares closed down more than 1% to $44.19.

- access Zoetis's press release on its financial guidance here
- here's the IBD story
- read more at Bloomberg

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