The Wall Street Journal vs. Zoetis
Hi reader,
I hope you are having a great holiday period.
This article is a “spin-off” from the paid section of the most recent News of the Week. This means that if you are a paid subscriber, you had the chance to read this last week. It’s a brief article where I discuss everything that’s going on between the Wall Street Journal and Zoetis regarding the company’s OA pain MAB Librela.
If you want to have access to all the content (in-depth analysis, industry research, company-specific articles, and more) you can subscribe using the following link:
I’ll release a deep dive on Keysight Technologies (KEYS) next week. The article will cover everything one needs to know about the company…
History and what the company does
Financials and growth drivers
Competition, moat, and risks
Management & Incentives, Capital Allocation, and Valuation
Sometime in January you can also expect the annual review, where I’ll discuss the past year and some interesting topics. You can read last year’s annual review here.
Without further ado, let’s get on with this article.
Back in April (I remember because I was on my honeymoon in the Philippines), the Wall Street Journal released an incendiary article on the side effects of Librela, Zoetis’ OA (Osteoarthritis) pain MAB used in dogs. The article claimed that Librela has had dangerous side effects on “thousands” of dogs and made its way through to Zoetis’ management team, which used the Q1 earnings call to reply with some data:
We also have a responsibility to empower our customers to make informed decisions grounded in science and data.
If you look at the rate of reported adverse events, it’s about 18 per 10,000 or 0.18% globally. And I think it’s important to keep in mind that no single adverse event is classified under the EMEA guidelines as more than rare, which is more than 1 to 10 out of 10,000.
Management’s quick reply together with Librela’s ongoing success, tamed the fears about the product’s danger, and Zoetis pretty much recovered all of its “fear-driven” drop since April: the stock was up 34% since its April lows by September. However, it has since performed poorly and it’s immersed in yet another downturn (albeit less severe):
This downturn is not dissimilar to the one the company suffered in April, in part because it’s also somewhat related to the Wall Street Journal (+ the FDA). The newspaper decided to strike back this week, publishing an article with the following title:
FDA Warns About Dangers of Dog Pain Drug.
The article claims the FDA sent a letter to veterinarians warning them about Librela’s side effects. This evidently happened (no reason for the WSJ to make this up), and you can find the letter here.
Now, how much news is this? Not much, to be honest. We already knew that Librela had side effects, and this letter probably signals that the FDA will adjust Librela’s label to include some of these. Investors should’ve also been aware about this potential label change as Zoetis’ management has discussed it in several earnings calls. The label change doesn’t seem worrying for several reasons…
It’s a customary procedure in the industry, considering that around 400 to 500 product label changes take place every year
The FDA still considers Librela a safe product
There’s no alternative to Zoetis’ drug in the marketplace (not a safer one, at least), meaning that a label change would probably have limited competitive implications
Owners who choose to administer Librela to their dogs typically do it as an option of last resort
There’s also something additional we have to consider related to the last point. We don’t have enough information to assess whether these side effects manifest themselves in older dogs or dogs of all ages, although we can sort of imply it. Considering that the FDA oversees the US and that Librela is still not widely used in moderate OA pain cases in this geography, we can assume that most side effects are manifesting themselves in old dogs with severe cases. This doesn’t make side effects disappear but helps us contextualize them. An owner of an old dog suffering might be willing to take the (very) small risk of Librela if there’s a 99.7% probability that it will improve its pet’s life.
The second thing I would point out is that while side effects are evidently there, the article claims that the FDA is reviewing 3,600 cases. The denominator here is critical to understanding how relevant these are, and the good news is that we have it. Zoetis claimed in its last earnings call that it had treated 1 million dogs with Librela in 11 months in the US, which means that the probability of occurrence of these side effects is 0.36% (3,600/1,000,000). This is pretty low without context, but maybe more so when considering that dogs currently treated in the US probably suffer from other conditions due to their age.
Another thing to consider is that Librela has been sold in Europe for almost 4 years, with reported adverse events being under 0.18%. It would be very interesting to see the proportion between mild/moderate cases and severe cases, but it’s safe to assume that if veterinarians continue to administer Librela in Europe to mild and moderate cases, it’s because they believe it’s safe.
So, where am I going with this? Yes, Librela has side effects, albeit they are very rare. Yes, Zoetis might have to tweak the product’s label soon, but this should not have a competitive impact (at least not a significant one) considering that there’s no comparable product, and in many cases, this is the treatment of last resort for many of its patients.
I believe Zoetis is currently suffering from headline risk more than a material risk to its business. Management also confirmed their confidence in last quarter’s earnings call and by raising the dividend by 16%. This might just be anecdotal, but I don’t think a management team would raise their dividend 16% if they expected trouble ahead. The good news is that Zoetis is back to a reasonable valuation, so I will not complain.
I’ll most likely bring a Zoetis deep dive after releasing Keysight, so feel free to subscribe to have access to it:
Have a great holiday period,
Leandro