Zoetis (ZTS): Who let the Dogs out?

A year ago Zoetis looked unstoppable. The New Jersey-based animal-health group had just rolled out Librela, the first monoclonal-antibody pain shot for arthritic dogs, and Wall Street penciled in another decade of double-digit earnings growth. Then, in April, the Food and Drug Administration warned veterinarians about seizures, ataxia and a handful of deaths linked to Librela therapies—a reminder that even pet drugs carry human-sized risks. Shares that once fetched more than $200 now change hands near $158, down a quarter from their 2024 high.

The Moat: Scale, Science and Shelf Space

Pfizer’s 2013 spin-off didn’t just inherit a stable of blockbuster brands; it also kept the industry’s deepest sales force. Zoetis calls on roughly 120,000 veterinarians world-wide, four times as many as its nearest rival, and owns 28 manufacturing sites that meet animal-specific biologics standards no generic maker can easily replicate. Patent cliffs are gentler in pet health than in human pharma—regulators demand species-by-species safety studies—so the company’s average product cycle stretches well beyond a decade. Those advantages show up in the numbers: return on invested capital still hovers around 30%, comfortably above big-pharma peers.

The Growth Engine: Pets With Chronic Ailments

More than half of Zoetis’s $9.3 billion in 2024 sales came from companion animals, a market that keeps expanding as owners treat dogs and cats less like property and more like family. Librela and its feline sister Solensia have opened a new $2 billion-plus category in osteoarthritis pain; management says the dog franchise alone could hit blockbuster status by 2027. Dermatology stalwarts Apoquel and Cytopoint still grow mid-single digits, and a once-quarterly flea pill under development could do for parasiticides what long-acting insulin did for diabetes care.

Pipeline depth helps. Phase-3 trials are under way for a monoclonal against feline dermatitis, a once-yearly cat vaccine for feline AIDS, and AI-driven diagnostics that turn urine sediment images into instant lab reports. These products extend Zoetis’s “razor-and-blade” model: own the procedure, then sell consumables and software around it. R&D, steady at about 9 % of revenue, is one luxury the company’s fat gross margins can afford.

Current Worries: One Needle, Many Nerves

The Librela safety headlines are the biggest near-term cloud. The FDA’s letter stopped short of restricting sales but did order a label change after reviewing 3,600 adverse-event reports—less than 0.02 % of the 18 million doses administered so far, Zoetis says. Still, in the age of social media, anecdotal stories travel faster than pharmacovigilance statistics. Management insists that vet ordering trends have held steady since the warning. Q2 results later this month will test that claim.

Competition is the second concern. Elanco’s Zenrelia, a daily JAK-inhibitor pill approved by the FDA in February, is gunning for Apoquel’s dermatology crown and has just won a positive opinion in Europe. Oral drugs are cheaper to make and could pressure pricing, though vets say switching well-controlled dogs is unlikely unless Zenrelia proves markedly safer. Elanco still must scale manufacturing and field forces; Zoetis has a decade-long head start.

Livestock, about 45 % of international revenue, is another swing factor. China’s pork cycle weighed on 2024 results, and beef margins are slim after a two-year drought drove feed costs higher. A normalizing herd and the gradual adoption of precision-vaccination technology should nudge that business back to low-single-digit growth, but it won’t light up the scoreboard the way pet drugs can.

Financials and Valuation

The sell-off puts Zoetis at roughly 25 times the Street’s 2025 earnings forecast of $6.40 a share, a discount to its five-year average multiple near 30. At a 9% earnings compound rate—the midpoint of management’s guidance—and a terminal growth assumption of 3 %, a discounted-cash-flow model lands around $200 a share, 25 % above today’s quote. A bear case that trims growth to 6 % and raises the discount rate to 8 % yields about $155. It seems that the market has given up on Librela altogether:

Stress Testing the Librela Scenarios

Base case – Assume safety fears fade, volumes keep compounding 25 % a year and Librela levels off at $2 billion in annual sales by 2030. Slapping an aggressive 5 × peak-sales multiple on that plateau prices the franchise at roughly $10 billion, or about $22 a share (based on ~450 million shares outstanding).

Failure case – Librela stalls: 2025 sales go sideways and then slip 10 % annually, stabilising near $300 million. The same 5 × yardstick values the asset at ≈ $1.5 billion, or about $3 a share.

What’s at stake? The swing between the two scenarios—roughly $8.5 billion, or $19 a share—equals only ~12 % of Zoetis’s $70 billion market cap. In other words, even under an aggressive sales-multiple approach, less than an eighth of the company’s value rides on Librela’s ultimate take-up, turning today’s headline-driven dips into attractive entry points for long-term investors.

The Bottom Line

Zoetis’s moat—scientific know-how, global scale and a relationship in nearly every vet clinic—remains intact. Librela’s safety chatter will keep making noisy headlines, but the math says the damage is modest. A sober analysis shows that even an outright flop would erase only about 12 % or $19 USD of Zoetis’s intrinsic worth—white the discount to historical multiples amounts to $45.

In other words, investors are being paid handsomely to endure the sound and fury. For those willing to look past the barking, the current sell-off is less a warning growl than an open gate to buy the industry’s alpha dog at a discount.