Ackman's demands may have irked Zoetis, but they bore earnings fruit in Q4

Dogs
Strong revenues in its companion animal business helped drive earnings growth for Zoetis in the fourth quarter.

Animal health giant Zoetis sailed into its fourth-quarter earnings report buoyed by news that activist investor William Ackman, a thorn in its side for two years, had sold off his stake entirely.

Executives and investors no doubt sighed with relief, not only about Ackman's departure but because Zoetis' results show it has, in fact, shaped up its bottom line—the very thing he had been pushing the company to do. 

Zoetis reported Q4 sales of $1.3 billion, in line with expectations. Its adjusted earnings came in at $232 million, or 47 cents per share, up 13% year-over-year and above the average analyst estimate of 45 cents. The company attributed the earnings growth largely to efficiency strategies implemented under Ackman’s critical eye, which included cutting underperforming products and exiting six manufacturing plants.

"We eliminated non-added-value activities, layers [of management] and products that were not meeting our expectations in terms of returns. The result is we have a company that is much more focused on what's important to customers," CEO Juan Ramón Alaix told FiercePharma. "Now we can use our resources in a different way that will be much more productive for the company." 

Even without Ackman's daunting presence, Zoetis is under pressure to prove it can maintain its growth. The company tempered 2017 forecasts because of unfavorable foreign exchange rates, telling analysts to expect revenue between $5.1 billion and $5.225 billion, versus the $5.15 billion to $5.275 billion it had previously estimated. It dropped its adjusted earnings estimate from somewhere between $2.28 and $2.38 per share to $2.26 to $2.36.

One analyst pointed out during the company's earnings call that Zoetis has boosted margins 1,000 basis points since 2012—a tough base to build upon, she noted. Alaix responded that the company is working on other efficiency strategies, including implementing technology to streamline connections with its customers. CFO Glenn David also pointed out that three additional manufacturing plants are slated for exits, which will lift margins slightly.

Mark Schoenebaum, an analyst for Evercore ISI, said in a note to investors that the top line could get a boost from a few products, including Apoquel, Zoetis’ hit treatment for atopic dermatitis in dogs. It was one of the products that helped drive companion animal sales up 2% during the quarter. Even more growth could come as Zoetis begins marketing the oral therapy for acute and seasonal use, in addition to chronic care, Schoenebaum predicts.

Alaix is particularly optimistic about Zoetis’ new atopic dermatitis treatment, Cytopoint, an injection given by veterinarians that is designed to relieve itchy dogs for four-to-eight weeks. “We’re maximizing opportunities in the clinic,” Alaix said. “Apoquel is a daily pill. With Cytopoint we can offer a complete set of solutions.” He added that Zoetis has been experimenting with direct-to-consumer advertising for Apoquel in some cities, which has been so well-received the company plans to roll out the ads more widely this year.

Meanwhile, Zoetis continues to rack up regulatory approvals for Simparica, its once-monthly medicine to repel fleas and ticks in dogs. And on Tuesday, it won European approval for Stronghold Plus, a combination treatment to treat several parasites in cats and to prevent heartworm.

Zoetis’ livestock portfolio didn’t perform quite as well, however. It declined 3% in the fourth quarter in the U.S. and 1% overseas. During the earnings call, Alaix cited challenges for food producers, including unpredictable sales cycles and pricing pressure. He told Fierce he expects growth in the livestock business to rebound somewhat this year, as the company strengthens its vaccine portfolio and expands its presence overseas. "With the diversity of our portfolio, we can face a challenge in one country but compensate with better performance in a different one," he said.

Zoetis’ stock dipped nearly 5% in early morning trading after the earnings announcement to $52.19, but its shares are still up about 25% since Ackman started building his stake. Now that he’s backed off Zoetis, the Pershing Square activist has turned his attention to other companies, including fast food giant Chipotle. (His recent purchase of Chipotle shares led TheStreet.com to quip that Ackman is swapping “pet meds for burritos.”)

Alaix says he's confident profitability will stay strong, driven largely by revenue growth in the companion animal side of the business. But he hopes a turnaround in the livestock market this year will also boost the bottom line. As for the Ackman experience, he says it resulted in a stronger Zoetis. "This company is much better prepared to generate future profitable revenue growth."