WEBVTT - Bloomberg Wall Street Week - September 27th, 2024 0:00:05.120 --> 0:00:09.360 This is Bloomberg Wall Street Week with David Weston from 0:00:09.480 --> 0:00:10.600 Bloomberg Radio. 0:00:13.039 --> 0:00:16.040 This is Wall Street Week. I'm David Weston bringing you 0:00:16.280 --> 0:00:20.320 stories of capitalism. This week, opportunity and why it's getting 0:00:20.400 --> 0:00:24.200 harder to succeed on our own merits and the companionship 0:00:24.239 --> 0:00:26.480 of our pets, and how it's led to a multi 0:00:26.520 --> 0:00:30.640 billion dollar industry. We start with the story about prudence, 0:00:30.960 --> 0:00:34.760 about getting the balance just right in life, in business, 0:00:34.960 --> 0:00:37.440 and when it comes to managing money, knowing when to 0:00:37.440 --> 0:00:40.640 take risks, the right risks to take, and when to 0:00:40.720 --> 0:00:42.240 avoid risks altogether. 0:00:44.640 --> 0:00:49.160 We obviously take credit risk and other risks, but people 0:00:49.200 --> 0:00:53.680 who operate in a community tend to know the good 0:00:53.680 --> 0:00:55.000 players and the bad players. 0:00:55.240 --> 0:00:58.520 That's Bill Dempschak, who, as CEO of PANC manages risk 0:00:58.640 --> 0:01:00.880 for a living. P and C is one of the 0:01:00.880 --> 0:01:03.800 so called regional banks that are at the core of 0:01:03.840 --> 0:01:06.880 the US banking system. They're not as big as money 0:01:06.880 --> 0:01:10.280 center banks like JP Morgan, Bank of America, and Wells Fargo, 0:01:10.480 --> 0:01:13.759 which have assets of just under ten trillion dollars combined, 0:01:14.360 --> 0:01:16.960 but they can be much larger than the community banks 0:01:17.000 --> 0:01:20.119 catering to individuals and local businesses, which are less than 0:01:20.160 --> 0:01:24.039 ten billion dollars in assets each. PNC, for example, is 0:01:24.040 --> 0:01:26.800 one of the largest regional banks with assets of over 0:01:26.840 --> 0:01:30.680 five hundred billion dollars. For a critical segment of American business, 0:01:30.720 --> 0:01:33.679 Regional banks get the balance just right. They lend to 0:01:33.720 --> 0:01:36.920 businesses like Perimunt Company, a privately held firm based in 0:01:36.920 --> 0:01:40.240 P andc's hometown of Pittsburgh. The company has grown to 0:01:40.240 --> 0:01:43.160 become one of the top five producers of titanium in 0:01:43.200 --> 0:01:45.280 the world and it's been banking with P and C 0:01:45.400 --> 0:01:46.880 since the very beginning. 0:01:47.560 --> 0:01:50.400 Where what you would call a medium fish or not 0:01:50.520 --> 0:01:56.000 a big fish, but our track record is unmatchable in 0:01:56.120 --> 0:01:59.240 our in the metals industry, and we like our position 0:01:59.320 --> 0:02:02.360 where we're at, you know, very we are very loyal. 0:02:02.640 --> 0:02:07.880 Our first meeting with PNC occurred in my parents' basement 0:02:08.320 --> 0:02:11.200 when we were just starting our company, and you know, 0:02:11.240 --> 0:02:14.120 it was over a couple of fold out tables where 0:02:14.720 --> 0:02:17.720 the bank came in and we pitched our plan to 0:02:17.760 --> 0:02:22.000 them on what we were going to do, and along 0:02:22.040 --> 0:02:25.440 with our business plan, along with our ideas, our vision 0:02:25.520 --> 0:02:29.520 or strategy. They said to my father, yes, Jim, we'll 0:02:29.560 --> 0:02:33.000 back you. And the relationship started there and it's done 0:02:33.080 --> 0:02:35.320 nothing but grow immensely over the years. 0:02:35.600 --> 0:02:38.760 Knowing its customers well over long periods of time helps 0:02:38.760 --> 0:02:41.040 the bank assess the risks it takes, but it can 0:02:41.080 --> 0:02:44.520 also make original Bank a true partner for local companies 0:02:44.520 --> 0:02:47.840 when they face turning points in their businesses, as Perman 0:02:47.919 --> 0:02:50.840 did when it moved to expand its world class titanium 0:02:50.880 --> 0:02:54.359 business into melting operations and faced a challenge that might 0:02:54.400 --> 0:02:56.799 have taken it outside of Pittsburgh. 0:02:57.120 --> 0:03:00.000 In two thousand and five, we were at the point 0:03:00.200 --> 0:03:04.680 we needed to expand significantly in our capabilities. We needed 0:03:04.720 --> 0:03:08.880 more facilities and more land, which we were at the 0:03:08.960 --> 0:03:11.959 point of growing out of space in some of our 0:03:12.000 --> 0:03:16.360 campuses in this region. Well, we were having a very 0:03:16.400 --> 0:03:22.560 hard time getting additional land for this expansion, and we 0:03:22.639 --> 0:03:25.760 started looking at the State of Virginia. Well, in the 0:03:25.800 --> 0:03:29.079 eleventh hour, I came to my executives here at PNC 0:03:29.680 --> 0:03:33.120 and said, Hey, this is what's happening. We can't get 0:03:33.160 --> 0:03:36.520 what we need in the region. Well, they immediately got 0:03:36.520 --> 0:03:41.120 in touch with the governor who started moving the roadblocks 0:03:41.200 --> 0:03:45.920 that were in place, and lo and behold that allowed 0:03:46.000 --> 0:03:50.560 us to grow further in this region, not leave the 0:03:50.680 --> 0:03:56.119 city not leave Pennsylvania, and PNC was a key. 0:03:55.960 --> 0:03:57.119 Part of that bill. 0:03:57.200 --> 0:04:00.320 Dempjack Ce's support for companies like perimunt as the core 0:04:00.480 --> 0:04:04.120 of his business, a basic banking business, serving customers and 0:04:04.120 --> 0:04:07.640 providing credit for key parts of the economy, knowing when 0:04:07.760 --> 0:04:11.480 and how to take risk and avoiding growth for growth's sake. 0:04:12.080 --> 0:04:14.280 Maybe it's part of our Pittsburgh roots. But what I've 0:04:14.280 --> 0:04:17.599 come to understand and all the years I've worked, is 0:04:17.680 --> 0:04:20.320 banking really is three yards in a cloud of dust. 0:04:20.839 --> 0:04:24.440 There isn't a magic answer. There isn't something that's going 0:04:24.520 --> 0:04:27.279 to cause you to you know, as we've seen double 0:04:27.320 --> 0:04:32.440 and triple in size safely. It's hard work, it's sticking 0:04:32.440 --> 0:04:36.200 to what you know. It's being relevant to clients. 0:04:37.520 --> 0:04:40.000 In the spring of twenty twenty three, regional banks were 0:04:40.000 --> 0:04:42.680 put in the spotlight, but the failure of Silicon Valley, 0:04:42.880 --> 0:04:46.640 Signature and First Republic banks, with questions raised about whether 0:04:46.720 --> 0:04:48.560 they were inherently more risky. 0:04:49.200 --> 0:04:52.680 What hit the news was than this notion of you know, 0:04:52.839 --> 0:04:55.560 regional banks as a group are in trouble, and the 0:04:55.680 --> 0:05:00.360 g sifies the giant money center banks are safe in 0:05:01.880 --> 0:05:05.039 you know, you saw a market share move to the 0:05:05.120 --> 0:05:08.200 larger banks during that period of time. Some of that 0:05:08.360 --> 0:05:10.200 was fair in the sense that people said, look, if 0:05:10.240 --> 0:05:14.000 I put my money at a JP Morgan, government will 0:05:14.000 --> 0:05:17.000 never let them fail, my money will be safe. And 0:05:17.040 --> 0:05:21.880 that's unfortunate because the descriptor of smaller necessarily being more 0:05:22.000 --> 0:05:26.160 risky is just fundamentally wrong. But I understood the mentality. 0:05:26.920 --> 0:05:30.080 Former Federal Reserve Governor Dan Trulo agrees that it was 0:05:30.120 --> 0:05:32.600 a mistake to lump in a bank like PNC with 0:05:32.720 --> 0:05:36.080 smaller versions of regional banks, and Tarula worries that the 0:05:36.120 --> 0:05:39.320 smaller regionals may get caught in a squeeze. 0:05:39.960 --> 0:05:43.880 So I think here's the dilemma, David. On the one hand, 0:05:44.680 --> 0:05:48.520 the regional banks that I'm talking about, a group between 0:05:48.640 --> 0:05:51.280 seventy and eighty billion and two hundred and twenty billion, 0:05:51.839 --> 0:05:56.120 are in a business model squeeze. They cannot compete with 0:05:56.240 --> 0:06:00.279 the pncs and USBs of the world, much less less 0:06:00.720 --> 0:06:04.800 with Chase Manhattan and Bank of America. They just don't 0:06:04.800 --> 0:06:08.360 have the scale to do it. Scale is becoming increasingly 0:06:08.400 --> 0:06:14.560 important as digitization, tech and eventually artificial intelligence become important 0:06:14.640 --> 0:06:17.640 parts of the banking business model. On the other hand, 0:06:18.080 --> 0:06:22.440 what's left of genuine relationship banking, that is banking in 0:06:22.560 --> 0:06:28.800 which subjective judgments about a potential borrower's position and ability 0:06:28.839 --> 0:06:33.159 to repay are of significant importance, where it hasn't mostly 0:06:33.200 --> 0:06:37.680 been reduced to numbers. That's where the community banks, fourteen eighteen, 0:06:37.800 --> 0:06:40.760 twenty twenty two billion dollar banks, that's where they have 0:06:40.880 --> 0:06:43.880 an advantage. And I think it's that group in the middle, 0:06:44.320 --> 0:06:48.280 which has neither the scale nor the capacity to be 0:06:48.440 --> 0:06:52.599 true local relationship lenders that are facing the squeeze. And 0:06:52.680 --> 0:06:55.200 I don't think it's a coincidence that those are the 0:06:55.240 --> 0:06:57.800 banks on which people feared runs a year and a 0:06:57.880 --> 0:06:58.800 half ago. 0:06:59.520 --> 0:07:03.320 And Bill Demchek agrees that regional banks like his have 0:07:03.400 --> 0:07:05.919 a vital role to play, but he's not sure that 0:07:06.000 --> 0:07:08.240 regulators have figured out what it is. 0:07:09.160 --> 0:07:11.880 One of the things I've asked all of the regulatory 0:07:11.920 --> 0:07:16.360 groups what their vision of banking is, and more often 0:07:16.360 --> 0:07:19.200 than they'll not they'll say, that's not my problem. Our 0:07:19.240 --> 0:07:23.720 problem is to keep banks safe. And if you point 0:07:23.800 --> 0:07:26.760 out to them the change in the banking landscape where 0:07:27.200 --> 0:07:30.400 you know a JP Morgan or a Bank America have 0:07:30.720 --> 0:07:34.960 organically grown a PNC every three years, you know they're 0:07:35.680 --> 0:07:38.120 I don't know what is it six seven times our 0:07:38.160 --> 0:07:41.000 size even though we are as an institution. If we 0:07:41.240 --> 0:07:43.960 just do what we're doing today, I think you'll have 0:07:43.960 --> 0:07:46.960 three or four banks that'll consolidate the whole country. With 0:07:47.080 --> 0:07:52.000 the exception of true community banks, which I think everybody 0:07:52.080 --> 0:07:56.000 up and down agrees as do I, serve a really 0:07:56.040 --> 0:07:58.240 important purpose in our country. 0:07:59.080 --> 0:08:02.040 Whatever the role of regional banks ultimately proves to be. 0:08:02.200 --> 0:08:04.760 Bankers like Bill Dempcheck doubt that the current approach to 0:08:04.800 --> 0:08:07.280 bank regulation accomplishes what it's meant to. 0:08:07.720 --> 0:08:10.320 In the end. If and I don't think we need this, 0:08:10.400 --> 0:08:12.160 but if they said, you know what, the banking system 0:08:12.360 --> 0:08:15.200 just needs more capital because we'll sleep better at night, 0:08:15.600 --> 0:08:19.200 I'd rather have them just say hold more capital, but 0:08:19.240 --> 0:08:21.440 then get out of my hair so that they don't 0:08:21.480 --> 0:08:23.600 tell me how I'm supposed to allocate it. We know 0:08:23.640 --> 0:08:26.880 how to allocate it. That's our business. You know. All 0:08:26.920 --> 0:08:30.680 of the rules they hit you with ultimately cause all 0:08:30.680 --> 0:08:33.480 the banks to kind of look the same based on 0:08:33.520 --> 0:08:36.959 whatever the FED models say, which aren't always the right models. 0:08:37.000 --> 0:08:39.880 It's a problem. I think we're long past a world 0:08:39.960 --> 0:08:44.920 where bankers are high flyers and are trying to bet 0:08:45.000 --> 0:08:50.160 on red I think that ended definitively in the financial crisis. 0:08:50.679 --> 0:08:56.040 I worry more about by putting everybody under the same 0:08:56.120 --> 0:09:01.239 microscope with the same models, we're replicating the same problems 0:09:01.600 --> 0:09:04.600 across the entirety of the system. You know, if the 0:09:04.640 --> 0:09:08.200 FED says in a stress test that this type of 0:09:08.320 --> 0:09:12.600 loan is bad, then nobody will do it because regulatory 0:09:12.640 --> 0:09:15.680 capital is too high. FED says this type of loan 0:09:15.800 --> 0:09:20.160 is good. What if it isn't everybody does it because 0:09:20.200 --> 0:09:20.960 the FED said so. 0:09:21.320 --> 0:09:24.800 If regulators are looking for systemic risk to address, Bill 0:09:24.880 --> 0:09:27.760 Demscheck suggests they look at the movement of assets outside 0:09:27.800 --> 0:09:31.400 the regulated banking system to the non bank banks, in 0:09:31.480 --> 0:09:35.640 part because of their growing codependency with other financial institutions. 0:09:35.920 --> 0:09:39.720 The shift of assets outside of the banking system, leverage 0:09:39.760 --> 0:09:43.360 lending and mortgage, we miss opportunities. Leverage lending is in 0:09:43.440 --> 0:09:47.800 our core target. You know, our clients are right there 0:09:47.800 --> 0:09:50.960 in Pittsburgh or Cleveland or Texas, and they're real companies 0:09:51.000 --> 0:09:55.160 and they're not necessarily catered to private equity or other 0:09:55.200 --> 0:09:58.439 buyout funds. But down the road it matters. I think 0:09:58.480 --> 0:09:59.600 mortgage matters a lot. 0:10:00.280 --> 0:10:03.559 Increasingly we see the non banks doing business with the banks. 0:10:03.960 --> 0:10:06.880 They're banking with the banks. Is there a potential risk 0:10:06.960 --> 0:10:09.520 in that basically that it could what has been thought 0:10:09.520 --> 0:10:12.640 to be a non systemic risk could actually get into 0:10:12.679 --> 0:10:14.840 the system particular, we're not able to see what's going on. 0:10:15.559 --> 0:10:20.439 Yeah, it's it's a really good question. You will probably remember, 0:10:20.480 --> 0:10:23.800 having seen recent comments and f SOOC notes if you 0:10:23.840 --> 0:10:26.160 read that stuff where the regulators are starting to say, wait, 0:10:26.200 --> 0:10:29.959 where's the interconnectedness here? And you know, all of the 0:10:30.000 --> 0:10:33.079 shadow banking system, you know, if it's still called that, 0:10:33.360 --> 0:10:37.000 from the retail lenders through to the leverage finance lenders, 0:10:37.080 --> 0:10:41.840 through to hedge funds. They exist because banks provide liquidity 0:10:41.920 --> 0:10:46.160 to them, so we empower You think about what's happened 0:10:46.200 --> 0:10:48.360 to the mortgage business. I think seventy five percent of 0:10:48.400 --> 0:10:51.960 it it's left banking and gone to not terribly well 0:10:52.000 --> 0:10:55.640 capitalized or funded institutions, and then banking provided them with 0:10:55.800 --> 0:10:59.360 liquidity lines for their warehouse. Things get bad, all those 0:10:59.360 --> 0:11:03.960 liquidity lines go away and they're left hanging. So it's 0:11:04.000 --> 0:11:07.480 the right conversation to have. And if you look specifically 0:11:07.480 --> 0:11:09.520 at that outcome, is that a good outcome? I moved 0:11:09.520 --> 0:11:11.680 it out of the banks. The banks still finance it all. 0:11:12.120 --> 0:11:15.520 I don't have line of sight into it anymore. But 0:11:16.160 --> 0:11:17.840 you know, I feel great about the banks. I just 0:11:17.880 --> 0:11:21.560 don't necessarily feel great about everything that now is non 0:11:21.640 --> 0:11:23.839 bank that I pushed out of the system, and we're 0:11:23.840 --> 0:11:26.760 gonna we'll have a day of reckoning with that at some. 0:11:26.800 --> 0:11:30.079 Point, whether you talk with a former regulator like Dan 0:11:30.120 --> 0:11:33.840 Trulum or a banker like PNC's Bill Demchek. The future 0:11:33.880 --> 0:11:36.760 of regional banks looks like it will lie with further consolidation, 0:11:37.360 --> 0:11:40.280 something that raises its own issues with integration and of 0:11:40.280 --> 0:11:43.880 course pricing, but that could make the system stronger if 0:11:43.920 --> 0:11:44.440 done right. 0:11:44.880 --> 0:11:47.839 I think mergers consolidation has to be a big part 0:11:48.080 --> 0:11:52.359 of the future of banking. One of the challenges everybody 0:11:52.679 --> 0:11:58.080 faces in this world of increasing technology spend in cyber 0:11:58.120 --> 0:12:01.160 and what clients expect in terms of the product delivery 0:12:02.320 --> 0:12:05.560 makes it hard for two medium size banks to get 0:12:05.600 --> 0:12:10.160 together and be anything other than larger, but not necessarily 0:12:10.200 --> 0:12:13.440 be any any better. You know, it gives them perhaps 0:12:13.480 --> 0:12:17.520 an expense platform where over multiple years they now have 0:12:17.679 --> 0:12:22.400 more to invest, but they are at a structural disadvantage. 0:12:22.960 --> 0:12:26.880 But whatever further mergers or acquisitions may lie in PNC's future. 0:12:27.040 --> 0:12:30.080 It's CEO and at least one of its longtime clients. 0:12:30.360 --> 0:12:36.160 I believe this regional bank will retain deep roots in Pittsburgh. Next, 0:12:36.320 --> 0:12:39.160 the billions of dollars we spend to keep our pets healthy. 0:12:39.520 --> 0:12:41.080 Here on Wall Street Week. 0:12:42.080 --> 0:12:45.480 You're listening to Bloomberg Wall Street Week with David Weston 0:12:45.640 --> 0:12:49.160 from Bloomberg Radio. Take a nut so random walk through 0:12:49.200 --> 0:12:51.080 hot topics and markets. 0:12:50.679 --> 0:12:54.600 And finance, the case of the counterfeit commodities, collateral. 0:12:54.200 --> 0:12:58.280 Tough times in the offshore wind sector, the Odd Lots podcast, 0:12:58.559 --> 0:13:01.040 Joe Wisenthal, and how does. 0:13:00.960 --> 0:13:02.959 Machine learning actually work? 0:13:03.080 --> 0:13:05.520 Listen on that book car playing at Android Auto with 0:13:05.600 --> 0:13:08.840 the Bloomberg Business and anywhere you'll get your podcasts. 0:13:08.880 --> 0:13:13.079 We're leaning into the sort of nineties Nickelodeon, SpongeBob five. 0:13:13.280 --> 0:13:19.880 Maybe Bloomberg podcasts context changes everything. This is Bloomberg Wall 0:13:19.960 --> 0:13:23.600 Street Week with David Weston from Bloomberg Radio. 0:13:25.800 --> 0:13:28.760 This is a story about companionship, the kind that eighty 0:13:28.840 --> 0:13:31.760 seven million households enjoying in the United States. It's the 0:13:31.840 --> 0:13:35.320 kind that can come only from pets, and Americans are 0:13:35.320 --> 0:13:37.280 willing to pay a good deal of money to make 0:13:37.320 --> 0:13:39.920 sure they can have it for as long as possible. 0:13:41.559 --> 0:13:43.400 Look at some of the incredible studies on this. 0:13:43.960 --> 0:13:47.320 Eighty six percent of pet owners would spend whatever it 0:13:47.360 --> 0:13:49.480 takes to take care of their animal fit was sick. 0:13:49.800 --> 0:13:52.600 And we said, okay, what if there was a twenty 0:13:52.640 --> 0:13:55.600 percent reduction in your take home income, would you change 0:13:55.600 --> 0:13:57.320 what you spend for your pet when it's sick? 0:13:57.480 --> 0:13:58.679 And they wouldn't change it at dime. 0:13:59.240 --> 0:14:01.480 It's a member of your family, and I think that 0:14:01.520 --> 0:14:04.200 really does change what you're willing to spend as well 0:14:04.240 --> 0:14:06.280 as the conditions that you're really going to pay attention to. 0:14:07.120 --> 0:14:10.960 That's Kristin Peck, CEO zoetis the largest animal healthcare company 0:14:11.000 --> 0:14:14.960 in the world, and she knows whereof she speaks. Last year, 0:14:15.000 --> 0:14:18.760 Americans spent thirty eight billion dollars to keep their pets healthy, 0:14:19.080 --> 0:14:22.200 up from fourteen billion dollars a decade ago, a jump 0:14:22.240 --> 0:14:25.600 of one hundred and seventy percent. That's more than people 0:14:25.640 --> 0:14:28.560 spent on gym memberships, and twice what they spent on 0:14:28.600 --> 0:14:31.840 takeout pizza or going to the movies. There's also a 0:14:31.840 --> 0:14:34.760 big business in the health and welfare of livestock, but 0:14:34.800 --> 0:14:37.520 it's the pets side of things that's showing the most growth. 0:14:37.960 --> 0:14:40.760 Pfizer spun off to at US eleven years ago. It's 0:14:40.760 --> 0:14:44.360 gone from focusing mainly on livestock to dedicating the lion's 0:14:44.360 --> 0:14:46.479 share of resources to our pets. 0:14:47.040 --> 0:14:50.720 It's evolved dramatically since our IPO about eleven years ago. 0:14:50.960 --> 0:14:53.640 Back then we were sixty five percent livestock, thirty five 0:14:53.640 --> 0:14:57.360 percent pet care. We've really invested aggressively in science based 0:14:57.400 --> 0:14:58.480 innovation and. 0:14:58.400 --> 0:15:00.000 Now it's actually flopped completely. 0:15:00.360 --> 0:15:02.800 We're now about sixty five percent in pet care and 0:15:02.840 --> 0:15:04.000 thirty five percent in livestock. 0:15:04.320 --> 0:15:07.880 The overall animal healthcare business grows between four and six 0:15:07.920 --> 0:15:11.400 percent a year, but since it's IPO, Zoetis has averaged 0:15:11.400 --> 0:15:14.800 a compound annual growth rate of eight percent, something Kristen 0:15:14.840 --> 0:15:18.400 Peck attributes to investment in research and development to create 0:15:18.600 --> 0:15:19.560 new treatments. 0:15:20.880 --> 0:15:24.160 That difference is really the science based innovation that we bring, 0:15:24.480 --> 0:15:28.000 bringing new treatments to new unmet medical needs. And as 0:15:28.000 --> 0:15:30.720 I look to the future, there's no reason that should stop. 0:15:31.040 --> 0:15:35.359 There are significant unmet medical needs across both companion and livestock. 0:15:35.760 --> 0:15:39.240 Major diseases such as chronic kidney disease and renal disease 0:15:39.360 --> 0:15:42.000 that right now has no treatment for cats and dogs. 0:15:42.480 --> 0:15:44.960 And beating the market as you have done. How much 0:15:45.000 --> 0:15:47.840 of that is organic? I would say internally generated as 0:15:47.840 --> 0:15:50.120 opposed to acquisitions. 0:15:49.560 --> 0:15:51.920 So almost all of it for us has been organic. 0:15:52.640 --> 0:15:55.520 We look very closely to what are the customer needs 0:15:55.520 --> 0:15:58.360 across the globe and meeting those needs. We have a 0:15:58.480 --> 0:16:01.320 very large R and D organization, and we spent five 0:16:01.400 --> 0:16:03.840 billion dollars in R and D. For example, since we 0:16:03.920 --> 0:16:07.000 iPod and our R and D expense grows double digits. 0:16:07.480 --> 0:16:10.520 We're really excited to discover the future of what animals need. 0:16:11.000 --> 0:16:14.320 Discovering that future and creating it could be the core 0:16:14.360 --> 0:16:17.960 of Zoetta's success story, and it's the purview of Rob Bohlzer, 0:16:18.200 --> 0:16:20.920 the man who oversees the firm's R and D efforts 0:16:20.960 --> 0:16:22.640 from its headquarters in Michigan. 0:16:23.440 --> 0:16:26.800 R and D within Zoetis represents about fifteen hundred colleagues 0:16:26.840 --> 0:16:30.680 across the globe. Nearly a thousand of those colleagues work 0:16:30.680 --> 0:16:34.040 here in Kalamazoo and in the Richland Farm area, and 0:16:34.600 --> 0:16:37.440 it's really at the core of the innovation for the company. 0:16:37.600 --> 0:16:40.840 So we really pride ourselves as a company to develop 0:16:40.840 --> 0:16:44.520 innovative medicines that are based in science, and you know, 0:16:44.560 --> 0:16:46.920 the R and D function is really key to bring 0:16:46.960 --> 0:16:50.640 those new innovations, you know, forward to marketed products for 0:16:50.760 --> 0:16:51.280 the company. 0:16:52.040 --> 0:16:54.600 Like other drug makers, Zoettas has made a business of 0:16:54.680 --> 0:16:58.200 taking big risks and hope of earning big rewards. Take 0:16:58.240 --> 0:17:02.800 for example, Zoeta's treatment for hermatitis in dogs historically treated 0:17:02.880 --> 0:17:06.560 with steroids mantil. Zoetis made a substantial investment in a 0:17:06.600 --> 0:17:08.600 new way to address the problem. 0:17:08.720 --> 0:17:11.480 At its core, R and D did a lot of 0:17:11.520 --> 0:17:15.320 the basic biology to understand, well, what is causing itch 0:17:15.720 --> 0:17:20.280 within dogs? Can we intervene safely? And the answer was yes. 0:17:20.359 --> 0:17:24.840 So through that research we identified that the jack pathways, 0:17:25.040 --> 0:17:28.040 it's a janis kindase, it's a group of enzymes were 0:17:28.080 --> 0:17:32.960 responsible for sending out chemical messagers in the body of 0:17:33.000 --> 0:17:36.800 the dog that made them mitche And through the work 0:17:36.840 --> 0:17:41.280 with our chemists, we designed a molecule that blocked that 0:17:41.280 --> 0:17:45.520 that communication, that messaging pathway, and you know, ensured that 0:17:45.560 --> 0:17:47.760 we had the right product profile because we wanted to 0:17:47.800 --> 0:17:51.400 be able to treat seasonal allergies as well as chronic 0:17:51.560 --> 0:17:55.119 itch in dogs. And you know, through that process spent 0:17:55.240 --> 0:17:58.919 about seven eight years developing that product, getting it to 0:17:59.080 --> 0:18:01.600 the regulatory thought news, and eventually getting on the market. 0:18:01.880 --> 0:18:04.720 And now after eleven years and twenty eight million dogs 0:18:04.800 --> 0:18:06.720 treat it, I think we have a lot of happy 0:18:06.760 --> 0:18:09.280 customers and less toy dogs out there. 0:18:10.160 --> 0:18:13.080 All that is good news for twenty eight million dogs, 0:18:13.280 --> 0:18:16.040 but also for Zoweta's bottom line after it took the 0:18:16.160 --> 0:18:19.919 risk and invested in Rob Pohlzer's research team to develop 0:18:19.960 --> 0:18:22.680 a new product based on an assessment of the likelihood 0:18:22.720 --> 0:18:27.000 of success and the possible payoff. As a CEO, perhaps 0:18:27.000 --> 0:18:30.240 your most important job is allocational capital. How do you 0:18:30.320 --> 0:18:33.080 decide how much capital to allocate toward. 0:18:33.359 --> 0:18:33.639 R and D. 0:18:34.080 --> 0:18:35.159 It's a robust process. 0:18:35.200 --> 0:18:37.200 I get this question a lot from investors, like what's 0:18:37.240 --> 0:18:38.879 the right amount and how do you know? 0:18:38.960 --> 0:18:40.280 And as we've talked. 0:18:40.080 --> 0:18:42.720 About, we spend a lot over five hundred million dollars 0:18:42.760 --> 0:18:44.560 a year in R and D and we've been growing 0:18:44.560 --> 0:18:47.639 that number double digits, and that's because we've had an 0:18:47.680 --> 0:18:50.800 incredibly successful R and D engine and we have a 0:18:50.840 --> 0:18:55.159 rigorous process where every project gets prioritized, it has a 0:18:55.960 --> 0:19:00.120 expected return on investment, and that's based on the probability 0:19:00.359 --> 0:19:03.360 that technically that program will be successful, and that there's 0:19:03.359 --> 0:19:07.320 a regulatory pathway to make it successful. And we prioritize 0:19:07.359 --> 0:19:09.560 all those and then we come up with an answer. 0:19:09.840 --> 0:19:12.119 But we don't stop there because there may be some 0:19:12.160 --> 0:19:14.640 big bets you want to make that you know you're 0:19:14.680 --> 0:19:16.119 not really sure what that value is going to be. 0:19:16.200 --> 0:19:18.840 I'll look at, for example, dermatology. Back when we launched 0:19:18.880 --> 0:19:21.960 the product in twenty fourteen, that's where like you know, steroids, 0:19:21.960 --> 0:19:23.560 they're fine, they should be fined. 0:19:23.680 --> 0:19:26.320 It was one hundred million dollar market. How valuable is 0:19:26.320 --> 0:19:28.399 that going to be? Maybe it's one hundred million dollars. 0:19:28.760 --> 0:19:31.240 So sometimes you've got to make bets because you really believed, 0:19:31.400 --> 0:19:33.399 even if the market doesn't see it today, that you 0:19:33.440 --> 0:19:34.440 think that's going to be big. 0:19:35.000 --> 0:19:37.840 That was the right bet. One hundred million dollar market 0:19:37.920 --> 0:19:38.480 in twenty. 0:19:38.280 --> 0:19:41.600 Fourteen is now one point five billion dollar market, of 0:19:41.640 --> 0:19:43.960 which were more than one point two billion dollars of that. 0:19:44.640 --> 0:19:48.439 Zoetis and others weighing the costs and benefits of research bets, 0:19:48.480 --> 0:19:51.840 now have a new partner in the form of artificial intelligence, 0:19:52.240 --> 0:19:55.840 something that experts like doctor Casey Kaser of Cornell say 0:19:55.920 --> 0:19:58.119 is one of the most significant additions to the field. 0:19:58.840 --> 0:20:01.480 I think there are several new so exciting developments in 0:20:01.560 --> 0:20:05.360 terms of drugs and treatments available for pets and veterinary 0:20:05.400 --> 0:20:08.000 medicine in general, and a lot of those are actually 0:20:08.119 --> 0:20:12.800 using artificial intelligence to help develop them or create them. 0:20:13.080 --> 0:20:15.320 For example, there are a lot of new efforts to 0:20:15.400 --> 0:20:19.679 create diagnostic tests using artificial intelligence that can do things 0:20:19.760 --> 0:20:23.280 like talith a dog or cat has kidney disease earlier 0:20:23.320 --> 0:20:27.200 than we currently can, or look at radiographs or X 0:20:27.320 --> 0:20:30.880 rays and help us diagnose things like hip displaysia in dogs, 0:20:31.080 --> 0:20:35.000 which is a degenerative and genetic condition. Other people are 0:20:35.080 --> 0:20:38.679 using generative AI, which is like chat GPT, So the 0:20:38.720 --> 0:20:42.840 Cornell University Feline Health Center has created a cat GPT 0:20:43.760 --> 0:20:48.000 which provides cat owners with helpful information online about their 0:20:48.040 --> 0:20:51.199 cat's health, so that people have a reliable resource to 0:20:51.240 --> 0:20:52.800 go to rather than just Google. 0:20:53.720 --> 0:20:56.480 As much as we anticipate that artificial intelligence is going 0:20:56.520 --> 0:20:59.640 to help us around the corner in diagnosing humans, Chris 0:20:59.760 --> 0:21:03.119 pet says that in animal healthcare it's already being used 0:21:03.520 --> 0:21:06.120 extensively and with immediate results. 0:21:06.960 --> 0:21:08.800 People talk about the future being AI. 0:21:09.119 --> 0:21:11.800 The future is here in AI in animal health, and 0:21:11.840 --> 0:21:15.439 we have multiple applications that we're currently using at the 0:21:15.520 --> 0:21:18.600 vet and with the pet owner. So the images platform, 0:21:18.640 --> 0:21:22.040 for example, is really fascinating in that we partnered with 0:21:22.080 --> 0:21:24.800 a company called tech Site. They had this technology where 0:21:24.800 --> 0:21:27.360 they believed firmly that they could take a really good 0:21:27.359 --> 0:21:29.679 picture and then you could use AI to compare it. 0:21:30.119 --> 0:21:31.920 But we had all the data, right, we have all 0:21:31.920 --> 0:21:34.439 the samples where we could train. We could train the 0:21:34.480 --> 0:21:37.960 AI with blood samples or with fecal samples to help 0:21:38.000 --> 0:21:40.520 it learn faster. And so it was really the partnership 0:21:40.640 --> 0:21:44.000 of a sort of AI company with the biology, the chemistry, 0:21:44.080 --> 0:21:46.560 the science that Zoett has had. And now we have 0:21:46.680 --> 0:21:50.440 six indications on this one platform. But we're looking at 0:21:50.440 --> 0:21:53.760 other applications of AI and using them today. So one 0:21:53.800 --> 0:21:55.760 of the things we hear from our customers is that 0:21:56.040 --> 0:21:58.240 it's so hard to get your cat in a carrier 0:21:58.280 --> 0:22:00.399 and get it to the vet and you don't know 0:22:00.440 --> 0:22:02.200 that there's a treatment or know your cat has it. 0:22:02.280 --> 0:22:02.959 Is it worth it? 0:22:03.359 --> 0:22:05.560 Well, you can now upload a video of your cat 0:22:05.720 --> 0:22:08.000 walking around your house, going up the stairs, and you 0:22:08.000 --> 0:22:10.600 can upload it to cat pain Iq and we can 0:22:10.640 --> 0:22:13.760 tell you the likelihood that cat has osteothritis and whether 0:22:13.760 --> 0:22:15.240 it would be worth it to bring your cat in. 0:22:15.680 --> 0:22:19.480