Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

The first group of questions is related to the recession and labor constraints we are seeing in vet clinics; how exposed is the companion diagnostic business to recession?

{audio:0:04:57} In 2008, there was an economic debacle in the US and I remember the CEO of Idexx saying companion animal health was immune to a financial crisis or recession. He said that because pets had become part of the family in 2008, and post pandemic, this has been accentuated more. I wouldn't say pets are immune to a recession, but I feel that being such an important family member providing so much comfort, pet owners would cut other expenses before considering drastic cuts in veterinary care. Perhaps elective surgeries will be delayed, but not acute care, emergency or infections.

{audio:0:07:10} Are point of care or reference labs more exposed to a recession?

{audio:0:07:23} Reference labs do specialty testing which cannot be done at point of care. Point of care includes hematology and blood chemistry, which are basic information for a wellness exam that a veterinarian needs to diagnose a pet, so in-house diagnostics would suffer less. Reference labs who do confirmatory tests will suffer more.

{audio:0:08:35} Human wellness tests are fine waiting 72 hours for a result, whereas pets are immediate; will point of care be used more for emergency than for wellness?

{audio:0:09:07} That occurs because human health is more regulated than veterinary care. Many point of care technologies enter a veterinary clinic earlier than a human hospital because the workflow is different. Given the option, people prefer immediate results. Being in this industry over 20 years, the majority of pet owners will pay a premium for an immediate response, to leave a consultation with a treatment plan. Reference labs offer some of this testing but the only shift would be associated with workflow, such as if a clinic doesn't have an available technician to run the point of care test.

{audio:0:12:18} Could a constraint in lab technicians affect the sales growth of the sector?

{audio:0:12:32} Every clinic has personnel constraints. The pandemic resulted in increased pet ownership, and all of those new puppies are now two and a half years old. Puppy care drove that explosion due to vaccination and deworming required in their first six months, which is why we are seeing a slowdown compared to 2020 and 2021.

{audio:0:14:15} What do vets think about the current diagnostic portfolio from Zoetis?

{audio:0:14:35} Zoetis has an extraordinary reputation from Pfizer Animal Health who were very innovative and progressive, so Zoetis has that strong reputation in pharma. Zoetis built their diagnostics through two failed acquisitions, one of which was in 2012 of a small French company called Symbiotics, whose products were not the best and were never integrated into the full portfolio. Being at Zoetis at the time, I saw the different culture between legacy Symbiotic and Zoetis employees, such that Zoetis employees did not want to be associated whatsoever to the Symbiotics portfolio. 

{audio:0:16:03} By 2018, Zoetis still had ambitions of participating in diagnostics, not only to take share from Idexx but because it made sense to include diagnostics with anti-parasiticides, vaccines, non-steroidal anti-inflammatory drugs and antibiotics, to show evidence that you need more medication. In 2018, they bought Scandinavian Micro Biodevices which was written off in 2020. Their portfolio never materialized into the development of products. In 2018, they acquired Abaxis, the number two player in the veterinary diagnostics market. Idexx had a strong reputation, excellent R&D and $3 billion revenue, whereas Abaxis had a questionable reputation, poor marketing and $250 million revenue. They bought that portfolio and worked with what they had, so their products aren't as bad as Symbiotics but are definitely not the same caliber as Idexx. Sophisticated veterinarians might notice legacy Pfizer products are very good but those from Abaxis are not, however Zoetis bundles their offering attractively by including diagnostics with anti-parasiticides and vaccines.

{audio:0:19:08} There is synergy from a revenue perspective, but how does it work? I know Zoetis bundles innovative with old pharma, but they also don't want to force clients out of long-term contracts they have with Idexx; could you give me an example offer?

{audio:0:19:53} They acquired Abaxis five years ago, so many Idexx contracts have expired. When I was there, Idexx was the leader, by far, with very little competition, so they were arrogant and had many restrictions and limitations to what customers could do. Customers often look for alternatives so even though Zoetis diagnostics are not the same caliber as Idexx, if your contract is coming to an end, Zoetis offers you freedom. They call their program Freedom Choice and FREEDOM FLEX because Idexx was their only option. An example bundle would be buying stock pharmaceuticals, with point of care analyzers, in a single monthly basket, which Zoetis incentivizes, as opposed to Idexx who only offer diagnostics.

{audio:0:22:49} Are there other synergies from the pharma and diagnostic businesses, perhaps from an R&D, commercial and technical support perspective?

{audio:0:23:09} Idexx is a sophisticated R&D engineering company who is very efficient in the manufacture of diagnostics. Zoetis has the same caliber with pharma products but not in diagnostics, because their R&D scientists came from Abaxis. I know Zoetis has eliminated those scientists because they were hiring new scientists. Like everything, there's a learning curve, and in five years, Zoetis remain less experienced than Idexx from an R&D process and engineering perspective.

{audio:0:24:58} Are there effective synergies between Abaxis and Zoetis?

{audio:0:25:15} All pharmaceutical companies compete by educating veterinarians about new innovations, and Zoetis has an excellent reputation for educational programs. US veterinarians have to complete continuous education credits, which Idexx and Zoetis do well. Zoetis chose a well-recognized veterinarian to be their chief medical officer for diagnostics to give them that credibility, so that would be one synergy.

{audio:0:26:39} What is the rationale for Zoetis to acquire reference labs in the US?

{audio:0:26:54} They were naive as far as how the diagnostic business works. They first purchased 50-year-old lateral flow Eliza tests from Symbiotics, then did the same with Scandinavian Micro Biodevices which is not important technology. Buying Abaxis gave them access to the hematology, chemistry and urine analysis point of care business. 50% of Idexx's $6 billion revenue is from the point of care in-house analyzer business. Veterinarians with these analyzers in clinic can do urine analysis, blood chemistry, hematology and blood coagulation, which is limited, but you get all consumables to do that and you have a full suite of specialty testing you can do at a reference lab. You need more than in-house analyzers to compete against Idexx's specialty testing bundle, meaning you need to buy reference laboratories, or you will remain in second place.

{audio:0:29:31} What are the main opportunities Zoetis can explore in the US diagnostic business and in international markets where diagnostics is not that penetrated yet?

{audio:0:29:47} Acquiring reference laboratories in the US is the right thing to do. Idexx already has reference laboratories in Japan, the UK, Spain, France and Brazil, so Zoetis will eventually have to follow that. International markets are more price sensitive but they still need to buy reference laboratories to complement their in-house analyzers.

{audio:0:31:54} If price is more relevant, would it make sense to have reference labs that can be leveraged on scale, so you can charge a lower price than in-house labs?

{audio:0:32:11} I agree, but the US has a sophisticated network to do reference labs. When Idexx was setting up their Brazilian reference lab, it was impossible to leave a sample, whereas in the US, everywhere you go, you see a box outside for samples for collection. In Brazil, they would either steal the sample or it would never get there because they lack the logistics sophistication. Idexx are sophisticated in Europe where samples are flown overnight from Germany to the UK for reference lab testing, so your results were ready in the morning. The key to reference labs is that they are a courier business.

{audio:0:33:59} The same thing happens with human blood. What are the key drivers vets consider when choosing a diagnostic provider for point of care and reference labs?

{audio:0:34:25} Service trumps performance; having somebody to answer your questions on Friday at five o'clock when you run out of material consumables and sending you more so you can continue to test over the weekend when clinics and emergency hospitals are open. The reliability of supply is important, particularly in international markets, as is technical support and service to veterinarians.

{audio:0:36:21} When you speak to vets who have been long term Idexx clients, what factors cause them to never consider changing?

{audio:0:37:12} When I was studying in 1996, Pfizer did well exposing their products to veterinary students, and there isn't a veterinary school without Idexx technology. Being exposed to any brand early creates loyalty. Some people feel they are very arrogant, but their products are so robust you will never encounter a problem. With other companies, you are buying a class B produce as a cheaper alternative. Vets who want reliability from the best product will stay with Idexx, whereas those who want to make more money by choosing the cheaper option might look for other alternatives.

{audio:0:39:16} Would you expect Zoetis' innovation in diagnostics to come from in-house R&D efforts or license agreements with strategic partners?

{audio:0:39:34} They do licensing agreements with strategic partners very well. Their recently launched IMAGYST scanner is Scandinavian and the AI algorithm and consumables are outsourced.

{audio:0:40:21} Who owns the IP of their analyzers and tests?

{audio:0:40:27} Zoetis has a strong business development group who play ball hard. Zoetis negotiated for the IP of their IMAGYST scanner which does fecal and blood chemistry, because Idexx had secured the IP for all veterinary uses. I was brought in to provide feedback around Coccidiosis in poultry and mastitis in milk. Once they do a deal with the company, they try to secure that deal for all veterinary applications and try to protect it with some IP. The IP around the technology is for the company who founded and developed the instrument, but Zoetis own the veterinary use case applications.

{audio:0:42:17} Relying on outsourced intelligence doesn't happen at Zoetis pharma; could this create issues in the life cycle development process of future point of care analyzers?

{audio:0:42:58} Commercial was frustrated that the internal R&D diagnostic pipeline wasn't yielding anything in terms of innovation, so they were forced to outsource. It's a big company in which both worlds coexist. They play to their R&D strength in pharma and their business development in diagnostics.

{audio:0:44:12} After Zoetis acquired Abaxis, they integrated their pharma and diagnostics sales forces, but recently they were separated again, do you know why?

{audio:0:44:26} They do that every year. When I joined in 2016, it was very separated due to the cultural differences. At that stage, Abaxis was not acquired yet but Symbiotics was, and I was brought in to see how we could resurrect the Symbiotics portfolio. The Pfizer people thought it would damage reputation and wanted nothing to do with Symbiotics so there was a separate organization Global Diagnostics with very little communication. Marketing had a brochure with everything because that was the CEOs dream, but that did not materialize at the street level. By 2018, they had integrated but pharma sales force learned diagnostics was a technical business which required necessary expertise. Today, they still have separate diagnostics sales reps because it's a specialized sale, but the sales reps of both diagnostics and pharma offer bundles.

{audio:0:47:20} How does Zoetis' contract pricing structure differ between US competitors?

{audio:0:47:41} Their main US competitors are Idexx and Elanco.

{audio:0:47:54} Could we stick to diagnostics?

{audio:0:48:03} In the diagnostic space, their competitors are Antech and Idexx, neither of whom have the flexibility to offer a bundle of pharmaceutical products. The FLEX program allows them to win points and offers airline miles and rebates. They get financial benefits by putting everything in one basket.

{audio:0:48:55} Idexx contracts are structured in a way that customers accumulate points which they can use to acquire new equipment; does Zoetis have a similar offering?

{audio:0:49:21} Veterinarians on the street have told me the Freedom Choice program offers vaccine and antibiotic discounts if you buy their diagnostics.

{audio:0:50:07} What share of revenue is diagnostics for US vets and corporates?

{audio:0:50:29} I feel it's a growing share and diagnostics companies talk about the vet selling the antibiotic because now it's for internal clinic use. They no longer sell to pet owners because they lost that revenue to chewy.com and other e-retailers. It used to account for 30% of their revenue. Idexx and Zoetis are service-based and generate revenue, so if you uncover the clinical case by doing more testing, revenues increase.

{audio:0:51:38} What is an average figure for independent clinics and corporates?

{audio:0:51:46} Wellness substitutes the 30% from pharma, so 25% to 30% at a private clinic. 

{audio:0:52:53} What diagnostic touch points does Zoetis have with vet clinics? Is it only their commercial and technical teams or are other parties also involved?

{audio:0:53:14} Primarily, those two but there are also industry meetings where they go all out on education. Their medical teams give lectures and interact with veterinarians, which is a higher level than a sales representative, though that's the technical services job in theory. There are many workshops in which vets accumulate continuous education credits. There is a lot of advertising and parties. Idexx and Zoetis also have sophisticated programs with university veterinary faculties.

{audio:0:55:25} Zoetis has existing relationships with vets in international markets where diagnostics is not that present, does that give them a competitive advantage over Idexx?

{audio:0:55:47} Idexx has had a reference lab in Japan for 20 years, Sao Paulo for 10 years and others in the UK, Spain and France for many years. The learning from international markets will be a competitive advantage in diagnostics. Zoetis is currently building that network of reference laboratories in the United States. They're not at the same level but, at the end of the day, those international markets continue to evolve and develop. Older veterinarians were slow to adopt technology whereas the younger generations of veterinarians all grew up with and are fascinated by technology. Young veterinarians are more comfortable with change and new technology, so having those reference labs outside of the United States will give Idexx a competitive advantage.

{audio:0:57:46} How innovative is Zoetis' newly launched scanner versus other solutions?

{audio:0:58:02} That scanner has artificial intelligence, but the gold standard is being done by a board-certified clinical pathologist looking into a microscope. The IMAGYST only does fecal and cytology, but the scanner picture has different optics than a microscope. For a diagnosis where you use your eyes to look at differences, a microscope is better, but there are many benefits of doing it in point of care. It's a very innovative platform but there is still room for improvement. That technology is good for histopathology, which looks at the full tissue, so you don't need the fine focus you do in cytology which looks at bacteria and hemoparasites in cells. These scanners are not at the same level as a pathological rate reference laboratory microscope.

{audio:1:00:24} Does Idexx have a similar solution?

{audio:1:00:28} Idexx introduced that scanner at least five years ago. New technology sounds very sexy, but I've heard from clinical pathologists that a general practitioner at a clinic is not good at identifying where the problem is. The pathologist gets pictures with nothing on them, so they end up mailing the slide back to the reference lab.

Zoetis, IDEXX Laboratories and Animal Diagnostics Competition

Former Commercial Executive at Zoetis and IDEXX Laboratories

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Former Commercial Executive at Zoetis and IDEXX Laboratories

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Zoetis, IDEXX Laboratories and Animal Diagnostics Competition(January 27, 2023)

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