Zoetis Q2 2022 Earnings Report

Zoetis EPS Results

• Actual EPS: $1.20
• Consensus EPS: $1.22
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: $1.19

Zoetis Revenue Results

• Actual Revenue: $2.10 billion
• Expected Revenue: $2.03 billion
• Beat/Miss: Beat by +$74.32 million
• YoY Revenue Growth: +7.80%

Zoetis Announcement Details

• Quarter: Q2 2022
• Date: 8/4/2022
• Time: Before Market Opens
• Conference Call Date: Wednesday, August 3, 2022
• Conference Call Time: 8:49PM ET

Zoetis (NYSE:ZTS) is a global animal health company that develops, manufactures and commercializes medicines, vaccines, diagnostic products and related services for livestock and companion animals. Its offerings are used by veterinarians, livestock producers and pet owners to prevent and treat disease, improve animal health and support productivity.

The company’s product portfolio includes pharmaceuticals, vaccines, parasiticides, dermatology treatments, diagnostic tests and genetic services. Zoetis serves markets for cattle, swine, poultry, fish, dogs, cats and horses, with operations and customers in numerous countries worldwide.

Zoetis traces its origins to the animal health business of Pfizer and became an independent publicly traded company in 2013. Kristin Peck has served as the company’s chief executive officer since 2020.

Zoetis Q2 2022 Earnings Call Transcript

Key Takeaways

• Zoetis reported 8% operational revenue growth in Q2 driven by a 14% increase in its companion animal portfolio, while the livestock segment declined 1% due to generic competition and swine pressures in China.
• The company narrowed full-year 2022 revenue guidance to 9.5–10.5% operational growth and raised adjusted net income guidance to 11–13%, reflecting confidence in Companion Animal performance and easing supply constraints.
• The Simparica franchise, including Simparica Trio, grew 47% operationally (72% in the U.S.), and although a competing triple-combo parasiticide is expected within six months, Zoetis expects ongoing market share gains through efficacy, label strength, and DTC marketing.
• Companion Animal diagnostics revenue fell 9% operationally in Q2 as a new U.S. go-to-market model disrupted sales, but international diagnostics growth and long-term investments support a recovery.
• Livestock products faced continued headwinds from U.S. generic competition on Draxxin/ZOMAX and COVID-related swine supply constraints, although international livestock sales grew 2% operationally.

Presentation

[Operator]

Welcome to the Q2 2022 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the investor relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial-in or on the investor relations section of zoetis.com. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad.

[Operator]

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. In the interest of time, we ask that you limit yourself to one question and then queue up again with any follow-ups. Your line will be muted when you complete your question. When posing your question, please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

[Steven Frank, VP of Investor Relations at Zoetis]

Thank you. Good morning, everyone, and welcome to the Zoetis Q2 2022 Earnings Call. I am joined today by Kristin Peck, our Chief Executive Officer, and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the investor relations section of our website, and that our remarks today will include forward-looking statements, and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including but not limited to our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures which were not prepared in accordance with generally accepted accounting principles or US GAAP.

[Steven Frank, VP of Investor Relations at Zoetis]

A reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing dated today, Thursday, 4 August 2022. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

[Kristin Peck, CEO at Zoetis]

Thank you, Steve, and welcome everyone to our Q2 Earnings Call for 2022. I'm pleased to say Zoetis delivered another strong quarter with 8% operational growth in revenue and 9% operational growth in adjusted net income, driven once again by the strength of our companion animal portfolio. We saw a balanced performance across our segments with similar operational revenue growth for both the U.S. and international, 9% and 8% respectively. Our diversity and strength across parasiticides, dermatology products, vaccines, and monoclonal antibodies for pain continue to demonstrate people's desire for innovative and effective care for their pets. We continue to see positive spending trends across the globe for pet care, and we grew 14% operationally in our companion animal portfolio.

[Kristin Peck, CEO at Zoetis]

As anticipated, our livestock portfolio continued to face challenges, declining 1% operationally in the Q2, largely due to generic competition, primarily in U.S. cattle and declines in swine products in China due to lower pork prices and COVID-related supply constraints. Overall, our business remains strong thanks to the durability of our global portfolio and a steady pipeline of new products. Even as we face uncertain macroeconomic conditions, continued supply constraints, generic competition, and the war in Ukraine, we remain confident in the resilience of our business and colleagues. As we look to the rest of the year, we are updating and narrowing our guidance to reflect our positive outlook for the remainder of 2022 and the negative impact of recent changes to foreign exchange rates. Wetteny will walk you through the details in his remarks.

[Kristin Peck, CEO at Zoetis]

As we look at the second half of the year, we remain confident in our long-term growth drivers and our ability to maintain a steady supply for customers despite inflationary pressures on the global economy and ongoing constraints for certain products. We all know pet owners love their dogs and cats, and pet care remains a very positive and robust market, showing little impact from broader consumer concerns with inflation or the global economy. As we expected during the pandemic, vet clinic visits are normalizing over time and spending continues to show strong growth based on the latest U.S. numbers.

[Kristin Peck, CEO at Zoetis]

The positive dynamic between pets and pet owners, which I've spoken about before, is proving sustainable and recession-resistant due to people's affinity for their pets, a willingness to prioritize medical care for their pets, and key demographic drivers such as the increased pet ownership by Gen Z and millennials and a greater percentage of high-income households owning pets. Our innovative companion animal portfolio is well suited to address these customer needs. Our key dermatology products continue to demonstrate strong growth, 22% operationally for the first half, and we see opportunity to expand in under-penetrated markets, especially internationally, and introduce lifecycle innovations like Apoquel chewable tablets.

[Kristin Peck, CEO at Zoetis]

We have more to come in the pipeline for dermatology, and we do not foresee any competitors for Apoquel or Cytopoint this year or in the first half of 2023. In terms of parasiticides, the Simparica franchise, including Simparica Trio, is performing extremely well, having grown 47% operationally through the first half of the year and is gaining share in the industry's largest category. We currently anticipate a competing triple combination parasiticide to be approved in the U.S. in the next six months with a possible launch next year. However, we believe Trio will continue to grow based on a strong label, proven efficacy, and the support of DTC marketing in the U.S. and international markets. Our monoclonal antibodies for pain, Librela and Solensia, are performing very well in approved markets across Europe, and we remain very confident in the blockbuster potential of these breakthrough treatments.

[Kristin Peck, CEO at Zoetis]

In terms of the U.S., we have begun early experience trials for Solensia and expect a broader market launch in the Q4. We still anticipate approval for Librela later this year, assuming FDA inspections are completed at facilities outside the U.S.. Meanwhile, our operational growth in international has remained steady throughout the first half of the year at 8% despite COVID lockdowns in China and revenue reductions in Russia and Ukraine due to the war. Excluding the impact of Russia and Ukraine in the first half, our international sales would have grown 9% operationally. This is the latest example of how our diverse portfolio and global footprint drive steady and sustainable growth for the business. While some markets may be experiencing setbacks in the quarter, other markets like the U.S., Australia, Southern Europe, and other emerging markets are driving our performance.

[Kristin Peck, CEO at Zoetis]

In the second half, we see China returning to stronger growth if COVID stays in check, and we continue to expect the diversity across geographies and species to remain strong. In terms of livestock, we expect continued pressure from generic competition, primarily in U.S. cattle and poultry products. However, we are generating growth across various livestock species in markets outside the U.S., and fish continues to perform exceptionally well. Finally, like many companies, we are managing through supply constraints this year with certain products. We continue working hard to optimize our supply chain this year so we can meet the increasing demand for certain key products. Looking ahead, we will continue to invest in the resources, DTC marketing, and manufacturing capacity we need to support our future growth and achieve results for our customers and shareholders.

[Kristin Peck, CEO at Zoetis]

We are advancing our Driven to Care sustainability goals that were established last year, and we published our 2021 progress update and ESG metrics in the Q2, highlighting achievements toward our DE&I aspirations, expanded climate goals, and support for the veterinary profession. We are committed to staying on our journey to be the most sustainable animal health company in the world. We also continue to invest in R&D, business development, and new capabilities across the business to enhance our portfolio and ensure our long-term growth. In the Q2, we continued to receive approvals for new products like Poulvac for certain HVT IBD ND, expand key franchises like Apoquel into new markets, and acquire new businesses to complement our portfolio, such as Basepaws, a pet care genetics company. In closing, our business continues to perform extraordinarily well in one of the most dynamic markets I've ever seen.

[Kristin Peck, CEO at Zoetis]

Diversity, innovation, and customer focus are our cornerstones for excellence. I want to thank our colleagues for their tenacity, commitment, and resilience as we continue to deliver for our customers and shareholders. Thank you. Now, let me hand things off to Wetteny.

[Wetteny Joseph, EVP and CFO at Zoetis]

Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a very strong quarter with growth across a number of our core franchises and the continued resilience of our end markets. Today, I will focus my comments on our Q2 financial performance, the key drivers contributing to our performance, and provide an update on our full-year 2022 guidance. In the Q2, we generated revenue of $2.1 billion, growing 5% on a reported basis and 8% on an operational basis. Adjusted net income of $567 million was flat on a reported basis and grew 9% on an operational basis. Of the 8% operational revenue growth, 3% is from price and 5% from volume.

[Wetteny Joseph, EVP and CFO at Zoetis]

Volume growth consisted of 6% from new products, which includes Simparica Trio and Librela, 2% from key dermatology products, while other in-line products declined 3%. The decline in other in-line products was expected and largely the result of the impact of intermittent supply challenges and generic competition for Draxxin. Companion animal products continued to be the primary driver of growth, growing 14% operationally, with livestock declining 1% on an operational basis in the quarter. Simparica Trio was the largest contributor to growth in the quarter. Trio posted global revenue of $237 million, representing operational growth of 72% versus the comparable 2021 period. We also continue to experience better than expected results from our Trio franchise outside the US, where we had sales of almost $30 million.

[Wetteny Joseph, EVP and CFO at Zoetis]

We expect to continue to grow the addressable market for flea, tick, and heartworm globally and see significant headroom for growth with brands like Simparica and Trio. Meanwhile, our key dermatology products, Apoquel and Cytopoint, had significant global growth again with $315 million of revenue, representing 16% operational growth against a robust prior year in which these products grew at 22% operationally in the Q2 of 2021. In Europe, our monoclonal antibodies for osteoarthritis pain in dogs and cats also meaningfully contributed to growth, posting $31 million in sales. Our global companion animal diagnostics portfolio recorded $83 million in revenue in Q2, declining 9% operationally. Growth in our international diagnostics portfolio was more than offset by a decline in our U.S. business in the quarter.

[Wetteny Joseph, EVP and CFO at Zoetis]

In the U.S., we experienced a decrease in sales resulting from our new go-to-market model and the build-out of a sizable and new dedicated field force for diagnostics. While disruptive in the short term, this investment is putting the necessary fundamental elements in place to position and grow our diagnostics portfolio over the long run. We expect the effectiveness of our new diagnostics field force to improve gradually over the remainder of the year. Diagnostics remains core to our business and a key long-term growth driver for Zoetis. Sales of livestock products declined 1% operationally in the quarter. Negatively impacting growth across the portfolio were global generic competition for Draxxin and the war in Ukraine. China swine products again declined due to lower pork prices and COVID-related lockdowns. Our U.S. poultry portfolio also continues to be challenged by generics and cheaper alternatives to Zoamix.

[Wetteny Joseph, EVP and CFO at Zoetis]

Meanwhile, our fish portfolio again grew double digits in the quarter and along with the strength of our sheep products in Australia, partially offset the broader decline. Overall, livestock performance in the quarter continues to be in line with our expectations. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.1 billion in the quarter, growing 9%, with companion animal products growing 13% and livestock sales declining 7%. Focusing first on companion animal, U.S. vet practice revenue trends continued to be positive, with practice revenue growing approximately 5%. Spending per visit remained strong again this quarter, increasing over 7%. Visits declined more than 2%, primarily due to challenging prior year comparisons.

[Wetteny Joseph, EVP and CFO at Zoetis]

In terms of vet clinic traffic, it is worth noting that visits in the Q2 were above the number of visits pre-COVID in the Q2 of 2019, and the trend line for growth in visits over the last several years continues to slope favorably. I would also like to point out that our companion animal portfolio in the U.S. had volume growth of 8% in the quarter. Our injectable portfolio of products that must be administered in the vet clinic also saw volume growth in the quarter. These products include Cytopoint, vaccines, and ProHeart. Underlying demand for veterinary care remains robust throughout the country even as people return to work.

[Wetteny Joseph, EVP and CFO at Zoetis]

While labor challenges do exist, as they do across most industries, we believe vet clinic revenue will continue to grow at levels above what we were seeing prior to COVID as the standard of veterinary care continues to increase through innovation, better demographics, higher compliance, and more pets. Companion animal growth of 13% in the U.S. was driven largely by sales from Simparica Trio, as well as key dermatology products. Growth of Simparica Trio was again strong in the quarter, with sales of $208 million in the U.S. growing 74%. We are pleased to see that a significant number of Trio customers are new to the flea, tick, and heartworm category altogether. In addition, we continue to meet our clinic penetration targets and take share within individual clinics.

[Wetteny Joseph, EVP and CFO at Zoetis]

These dynamics will provide additional runway for future expansion of both the broader market and revenue growth for Trio. Key dermatology product sales were $219 million for the quarter, growing 11%, with Apoquel and Cytopoint each significantly contributing to growth. Year to date, our derm portfolio grew 16%. Our investments to support our derm portfolio have been instrumental in driving more patients into the clinics and we will continue to invest meaningfully in this space as a large portion of dogs with dermatitis remain undertreated, representing an opportunity to further expand the market. US livestock declined 7% in the quarter, driven primarily by sales of cattle products as a result of generic competition for Draxxin. Meanwhile, our poultry portfolio continues to be negatively impacted by the expanded use of lower-cost alternatives and generic competition for Zoamix.

[Wetteny Joseph, EVP and CFO at Zoetis]

Swine product sales grew in the quarter as a result of increased disease prevalence and favorable market conditions for producers. Moving on to our international segment, where revenue grew 2% on a reported basis and 8% operationally in the quarter. Companion animal revenue grew 16% operationally and livestock revenue grew 2% operationally. Increased sales of companion animal products resulted from growth of monoclonal antibodies for alleviation of osteoarthritis pain, our key dermatology products, and the Simparica franchise. These core brands continue to benefit from our international direct-to-consumer promotional campaigns, and we remain excited with the long-term prospects of these programs. We continue to be pleased with the performance of our monoclonal antibodies for OA pain, with Librela generating $26 million and Solensia delivering $5 million in Q2 sales. Librela remains on track to exceed $100 million in revenue this year.

[Wetteny Joseph, EVP and CFO at Zoetis]

As we have mentioned in prior quarters, Librela is the number one pain product in the EU, with the underlying performance metrics being very favorable for future growth. Reordering rates remain high, compliance continues to exceed our initial expectations, and we continue to see significant opportunity to expand the pain market with a meaningful percentage of dogs on Librela being new to the market. It is also worth noting that we are observing similar pet owner and vet clinic trends in many of our key international markets that we are seeing in the U.S.

[Wetteny Joseph, EVP and CFO at Zoetis]

The higher standard of care and better demographics, as well as a more rapid adoption of innovation, continue to expand markets for our products, and we expect these trends to continue. Volume growth in our international companion animal portfolio was 10% in the Q2, and we also saw growth across our injectable products, including monoclonal antibodies, vaccines, and TidalPoint. Meanwhile, international livestock grew 2% operationally in the quarter, with solid growth across fish, cattle and sheep. Our fish portfolio experienced increased demand for vaccines in key salmon markets, including Chile and Norway. Cattle grew through favorable market conditions and price in key emerging markets, including Australia, Turkey, China, and the U.K.. Sales of sheep products grew as a result of favorable market conditions and new product launches in Australia.

[Wetteny Joseph, EVP and CFO at Zoetis]

Growth was partially offset by continued weakness with the price of pork and COVID-related supply challenges in China, as well as unfavorable producer rotational programs with MFAs in Europe and reduced flock sizes in Latin America impacting poultry. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 69.8% decreased 120 basis points on a comparable basis to the prior year, resulting primarily from unfavorable foreign exchange impacts, as well as higher manufacturing, freight and other costs, partially offset by favorable price and mix. Adjusted operating expense increased 10% operationally, with SG&A growth of 8% operationally, driven by promotional and marketing expenses related to key brands and new product launches, as well as T&E costs beginning to return to pre-COVID levels.

[Wetteny Joseph, EVP and CFO at Zoetis]

R&D expenses increased 16% operationally due to higher compensation costs, increased spending on projects and higher operating costs. The adjusted effective tax rate for the quarter was 20.7%, an increase of 70 basis points driven by changes in the jurisdictional mix of earnings and lower discrete tax benefits related to share-based payments. Finally, adjusted net income grew 9% operationally and adjusted diluted EPS grew 10% operationally for the quarter. Capital expenditures in the Q2 were $446 million. We are still anticipating a significant increase in capital expenditures for the back half of 2022, primarily related to investments in Ireland, the U.S., and China to support manufacturing capacity needed to meet our long-term growth demands. In the quarter, we returned over $600 million to shareholders through a combination of share repurchases and dividends.

[Wetteny Joseph, EVP and CFO at Zoetis]

We repurchased approximately $450 million of Zoetis shares, representing our largest share repurchase ever. Now moving on to our updated guidance for the full year 2022. For operational revenue growth, we are maintaining the midpoint and narrowing the range of growth to 9.5%-10.5%, previously 9%-11%. We are increasing our operational growth expectations for adjusted net income to a range of 11%-13%, previously 10%-13%. This change in guidance signals increased confidence in the back half of the year due to the continuing outperformance of companion animal, easing of certain supply constraints and an improvement in our business in China. Please note that our guidance for adjusted interest expense and OID was changed to reflect favorable changes to interest income.

[Wetteny Joseph, EVP and CFO at Zoetis]

Foreign exchange rates on our updated guidance are as of late July and reflect the continued strengthening of the U.S. dollar. Beginning with revenue for the full year 2022, due to the narrowing of our range and the impact of foreign exchange, we are now projecting revenue of between $8.225 billion and $8.325 billion. We now expect adjusted net income to be in the range of $2.35 billion-$2.39 billion. Finally, we expect adjusted diluted EPS to be in the range of $4.97-$5.05 and reported diluted EPS to be in the range of $4.65-$4.75.

[Wetteny Joseph, EVP and CFO at Zoetis]

While guidance represents our outlook for the full year, due to the unique factors impacting our business in 2022, I would like to note that our guidance for growth, especially for revenue and adjusted net income, will be weighted towards the end of the year. While we expect operating expenses to be incurred at a similar rate across the back half of the year, we are noting an easier OpEx comp in Q4 than Q3 due to heavy spending in the Q4 of last year. Also, in Q3 of last year, we experienced an unusually low adjusted effective tax rate of 16.7% due to favorability related to foreign-derived intangible income and certain discrete items. We do not expect similar favorability this year.

[Wetteny Joseph, EVP and CFO at Zoetis]

Our full year 2022 guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue over the long term. Our success will continue to come from our diversified portfolio of enduring brands driven by multiple sources of in-line growth, productive innovation and an infrastructure to develop and expand markets globally. We expect to continue to execute across multiple dimensions of our business and capitalize on favorable end market dynamics for the foreseeable future. Now I'll hand things over to the operator to open the line for your questions. Operator?

[Operator]

At this time, if you would like to ask a question, please press star one on your telephone keypad. To withdraw yourself from the queue, you may press the pound key. We'll take our first question from Michael Ryskin of Bank of America.

[Michael Ryskin, Managing Director at Bank of America]

Great. Thanks for taking the question. I'm going to try to squeeze in two real quick. First, on your comments on the Trio competition, Kristin, certainly something that's been talked about and anticipated for a while, but I'm curious if you have any updated thoughts on how you'll respond. Is it going to be a change to how you price, Simparica Trio or any additional promotional or DTC plans you're going to try to implement in the next six months? And I'm wondering if it's too early to give us, maybe a ballpark dollar target for next year. Is it crazy to think that you could hit

[Michael Ryskin, Managing Director at Bank of America]

$1 billion in Trio sales in 2023. A quick follow-up if I can. On margins for the year, Wetteny, can you walk us through the impact to margins, both on gross margin and OpEx? Just wondering how that factors into the updated outlook. Thanks.

[Kristin Peck, CEO at Zoetis]

Sure. I'll take the first one, Mike. Thanks for the question. You know, for starters, we were really pleased with the performance of Simparica Trio and Simparica franchise in the quarter with 72% growth. We do expect, even with competition, to grow the franchise here. What we're really seeing in the market is a strong shift from topicals and collars to orals as a new standard of care. We see the category, you know, certainly growing. We still believe we've got some number of advantages for being first to market. We've gotten a lot of customers enrolled in autoship, which is really helping continue to drive growth there. We've got, you know, strong relationships with the large corporates.

[Kristin Peck, CEO at Zoetis]

Importantly on that issue, we still believe we've got significant room to expand in our penetrated clinics as we look at what our penetration within those clinics is. The other thing is, we really don't believe you're going to see tons of switching without significant differentiation, which honestly, we're not really expecting. This remains a significant market, and right now, the Simparica franchise is number two in the U.S. in flea, tick, and heartworm. You know, we are expecting approval of a potential competitor sometime in the back half of this year, and then obviously launching, you know, likely sometime next year. We continue to believe that we can grow the franchise.

[Kristin Peck, CEO at Zoetis]

We're going to invest highly in that, through direct-to-consumer, through our field force, and we believe given all the issues, and opportunities we have, we can continue to grow this franchise.

[Wetteny Joseph, EVP and CFO at Zoetis]

Yeah, I understand Mike, your question on margins and OpEx. If you're looking at our gross margins on a year-to-date basis, if you take out the impact of FX, we're running about 20 basis points above last year. In the quarter, you saw gross margins down about 120 basis points, but that's all FX driven. We've effectively maintained our OpEx growth range in our guidance and we're able to raise the bottom line guidance to 11%-13% versus 10%-13% that we started the year with. Again, FX is having an impact here, but we are executing according to our plan and we'll see an improvement even on the bottom line growth rate.

[Operator]

Our next question comes from Erin Wright of Morgan Stanley.

[Erin Wright, Senior Equity Research Analyst at Morgan Stanley]

Great. Thanks. Could we get an update on Librela, both the U.S. approval and the supply chain constraints for that product in international markets? At this point, do you think you have visibility if supply chain constraints will have any sort of impact on the U.S. launch in terms of timing? After you do get approval in the U.S., will you be ready to broadly launch that product immediately? Just in terms of the guidance, how should we be thinking about what's embedded in the guidance for companion animal and livestock growth for the balance of the year? Are there any sort of dynamics from a quarter-to-quarter basis that we should be thinking about? Thanks.

[Kristin Peck, CEO at Zoetis]

Great. Thanks, Erin. I'll take the first one. Let Wetteny take that second question. We are really pleased so far in the Librela success outside of the U.S., and we'll talk a little bit what I think the implications there therefore are within the U.S. Right now, Librela is the number one OA pain product in dogs in the E.U. already, which, you know, we think is outstanding. You know, if you look at its success, it's you know, really been embraced, and we see very strong reorder rates right now. Really impressively, 40% of dogs are new to the category, and we're seeing a 90% reorder rate. We're really pleased. This is a product, as you've noted, that does share some components with human COVID vaccines.

[Kristin Peck, CEO at Zoetis]

We've been managing that very carefully, making sure as we launch, that we have adequate supply since this is a chronic medication. Really have been thoughtful about that. We do believe we've got additional capacity, coming online at some of our suppliers as we look into the second half of this year and into next year. You know, as we look at the rest of this year, we, as we said, we believe this product will be a blockbuster this year, you know, over $100 million. We're very optimistic, you know, assuming we get the approval as we're expecting in an inspection this year, to be able to move exactly as we did in Solensia next year with an early experience, in the first half, you know, followed by a full launch.

[Kristin Peck, CEO at Zoetis]

Remain very excited, investing heavily behind this, and believe we're working really hard on the supply chain unless something changes dramatically. We are confident we will have the supply we need for a successful launch in the U.S. next year.

[Wetteny Joseph, EVP and CFO at Zoetis]

Yeah. Erin, with respect to our guidance and how you should be thinking about companion animal versus livestock, so far year to date, we've delivered 9% operational growth at the top line, largely driven by companion animal. I think you can expect that to continue in the back half of the year when you consider as Kristin just mentioned, Solensia will be fully launched in the second half in the U.S. Here we'll continue to see growth in Trio. And with Librela, which we expect to be a blockbuster in the EU this year, we delivered $21 million in the Q1, $26 million in the Q2. That will continue to ramp. I think those will contribute towards companion animal continuing to drive.

[Wetteny Joseph, EVP and CFO at Zoetis]

When I think about livestock, we do see easier comps in the back half than we would have had in the first half. If you recall, swine in China, for example, prices started to really decline in the second half of last year. That becomes an easier comp when you think about Q3 and Q4. For cattle, we did have some price adjustments in the Q4 last year on Dra, leading into the start of the year. Those make for a slightly easier comp from a cattle perspective in the Q4 Those are some of the considerations, but I would expect the second half to look more like the first half in terms of contribution from companion animal compared to livestock.

[Operator]

Our next question is from Jon Block of Stifel.

[Jonathan Block, Managing Director at Stifel]

Great, guys. Thanks. Good morning. I'll try to ask two long ones up front. Key Derm, I think it was up 22% operationally in first half, but, you know, I think it slowed from 27% in Q1 to 16% in Q2, and I got a sort of a similar year-ago comp. Can you talk to, Kristin, your thoughts on the atopic derm growth? Call it just a trajectory going forward. Does the chewable version offer a price premium for you guys? I think, Kristin, you also talked about just no competition for maybe the next ten months, just how you have that line of sight. Then shifting gear, second question to livestock. That market just always seems to be evolving. Would love to get your thoughts on normalized growth returning to the industry in 2023.

[Jonathan Block, Managing Director at Stifel]

Kristin, I think you called it out last quarter. Does that stay intact? Would your growth be representative of market since I think you're gonna get it soon on the back end of some of the generic headwinds that you've been facing? Thanks, guys.

[Kristin Peck, CEO at Zoetis]

Sure. Thanks so much, Jon. I'll take the first question and let Wetteny take the second one on livestock. You know, we are very pleased with, you know, continued growth of Derm. To your point, in the first six months of the year, it grew 22%. In the quarter, it was 16%. There always has been some cyclicality. We really believe we can continue to grow this franchise. We can expand it as we have been through both branded and unbranded DTC. As you know, we just began this year really an investment in unbranded DTC in Europe, where we're now seeing significant pick up there. You know, we continue to see people home with, you know, pets more.

[Kristin Peck, CEO at Zoetis]

Importantly, there are still, in the U.S. alone, six million dogs, you know, who are still itching, who do not get, you know, have not received a product. So, we think we can continue to grow this. You know, to your question on competition and life cycle innovation, we are investing heavily behind life cycle innovation. This is our category. As you saw last year, the franchise is already worth $1 billion, so we will work heavily to defend this, both with chewable and with other products in the pipeline. You know, chewable is, you know, a real advantage for a lot of people who has trouble, you know, giving pills to their dogs and getting them to take it.

[Kristin Peck, CEO at Zoetis]

I would say there may be a slight price, you know, depending. It's very market specific as you look at the pricing there. To us, it's really building the loyalty to our franchise overall. We don't have ongoing competition, as you know. It's not a perfect science in our industry. As you saw, we did, you know, on the Simparica Trio since that we do see competition. Mostly, that is through working with, you know, chatter in the marketplace, as well as with distributors and our large corporates who start negotiating differently with us when they believe there's gonna be competition in a space. We are not seeing that in the same way that we are just starting to see that now on ongoing competition for, you know, our Simparica Trio franchise.

[Kristin Peck, CEO at Zoetis]

You know, we continue to believe we can grow this franchise with new innovation, with the strength of our commercial infrastructure, with our investment in DTC. I'll let Wetteny take the second question on livestock.

[Wetteny Joseph, EVP and CFO at Zoetis]

Yeah. When you look at livestock, historically, we've seen livestock grow around the 4% range. Certainly you're very familiar with what's happened the last few years in terms of ASF. For us, with generic competition with Draxxin and Zoamix, the year is essentially executing as we expected on livestock. We continue to believe that we can see livestock returning to normalized growth in the 2023/2024 timeframe. Long term, when you look at livestock, we continue to see growth in this business long term, given population growth. We see urbanization as well as growing middle class, particularly as you look across emerging markets. Even this year, if you look at this quarter, for example, livestock grew 2% internationally despite the headwinds in swine.

[Wetteny Joseph, EVP and CFO at Zoetis]

As I said, those comps get easier in the back half. If you look at Russia and Ukraine, for example, another point there. We're seeing growth in emerging markets on livestock. We expect those to continue in long term with innovation as well, as we continue our swine vaccines that we are launching, vector vaccines on the poultry side, immunotherapies in cattle, etcetera. We would expect to continue to drive growth in livestock long term.

[Operator]

Our next question comes from Christine Rains of William Blair.

[Christine Rains, Healthcare Equity Research Associate at William Blair]

Hi. Yes, thanks for the question. Just piggybacking off of that last point, can you further review those pipeline highlights in the works, for your livestock portfolio? Just related, on the comparatively well, international growth in livestock this quarter, can you discuss the factors there that drive the different performance between international and domestic here? Thanks.

[Wetteny Joseph, EVP and CFO at Zoetis]

Yeah, sure. I'd be happy to do that. Look, I think as we entered the year, we expected, given a second year of generic competition for Draxxin, our largest product, in cattle, and to some extent in swine, as well. We expected that to drag our livestock performance in the U.S. Again, that's essentially executing as we thought. What that is masking somewhat is the innovation that we are launching in swine, for example, with vaccines in swine or vector vaccines that we have been launching will continue to drive in livestock as well. We are seeing growth in emerging markets. You saw 2% growth in the quarter.

[Wetteny Joseph, EVP and CFO at Zoetis]

Again, that was offset partially with a Russia and Ukraine impact here, given the conflict there, as well as in swine. As you know, from the second half of last year, we've seen a decrease in price that has impacted the performance there. Although we have seen a lift in price on swine over the last number of weeks or months in China, we expect that to continue as we execute through the second half of the year.

[Kristin Peck, CEO at Zoetis]

Yeah, I'll take a little bit more on your question on the pipeline and livestock. You know, to build on what Wetteny's saying, we do continue to believe that there's significant growth opportunities in vaccines and livestock. That's what our customers are looking for. As Wetteny referenced, we've been launching some vaccines in swine. Certainly, vector vaccines, we just announced an approval of a second vector vaccine in poultry. We'll be launching more vector vaccines in that poultry franchise as well. Really excited, as I mentioned earlier, about fish, with 23% growth in the quarter. Alpha Flux really focusing on sea lice and other potential vaccines there. You know, as you look at that more broadly as we look out a little farther, investment in immunotherapies, as well as in precision livestock farming.

[Kristin Peck, CEO at Zoetis]

You know, continuing to add to our BLOCKYARD product there, to our genetics business there. We do see a number of key platforms in livestock to drive innovation in the space. You know, as Wetteny said, I think you can get back to the, you know, historical growth rates of around 4% as we, you know, hopefully lap some of these generic issues around Jackson and Xovix in poultry and the ASF issue in China. I think to get above that, which, you know, we certainly aspire to do, it's gonna take bringing innovation, and we are certainly investing to be the leader in innovation in livestock.

[Operator]

Our next question comes from Nathan Rich of Goldman Sachs.

[Nathan Rich, Research Analyst at Goldman Sachs]

Hi, good morning. Thanks for the question. Kristin, you talked about the capacity and labor constraints that clinics are facing, but I think you noted vaccines and injectable products continue to grow. I guess, could you maybe talk to, you know, your ability to continue to grow those products in the current market backdrop? I guess ultimately the bigger picture question is, you know, if we see these market dynamics both from a macro standpoint as well as, you know, some of the pressures the vet clinics are facing continue into next year, I guess, how should we think about growth? I guess, should we expect a similar level of companion animal growth as to what you're guiding to in the back half? Thank you.

[Kristin Peck, CEO at Zoetis]

Sure. You know, I think what's important to, you know, keep in mind is that, you know, vet clinics are doing quite well. If you look at growth in vet clinic revenue since 2019, it's up 20%. There's definitely with, you know, a 5% increase in the number of pets in the U.S., there are capacity constraints to meeting all the needs. But I think what's important to remember also is we are not leveraged as highly as some other businesses to in-clinic visits. A lot of our key products are chronic. So if you look at our Derm portfolio, our Paras portfolio, et cetera, we're still seeing, you know, tremendous growth. We had a 10% volume increase in the quarter in US products.

[Kristin Peck, CEO at Zoetis]

I think it's important to think, you know, there's more movement to online and other places. We don't see some of this capacity issues as a major issue for us in continuing to grow our business. You know, you're seeing some of the same capacity constraints in Europe, and yet you're already seeing us, you know, have Librela, you know, looking to be a blockbuster product this year. I think what really differentiates us is innovation. When there's important science and new products vets are excited about, we're still seeing great attention at the vet clinic for that, and really driving that through.

[Kristin Peck, CEO at Zoetis]

You know, although a lot of people are very focused on vet visits, given we're not as leveraged to that, we really think the spend per visit is really important, and I think we're leading in that category given innovation.

[Operator]

Our next question comes from Louise Chen of Cantor Fitzgerald.

[Louise Chen, Senior Research Analyst at Cantor Fitzgerald]

Hi, thank you for taking my question here. Wanted to ask you, are there any metrics that you can point to support price and demand elasticity in the pet health space? Do you think about this the same way in livestock? Thank you.

[Wetteny Joseph, EVP and CFO at Zoetis]

Well, I think certainly when we look at price and demand, we've continued to see opportunities to take price at or above inflation, and we've demonstrated that over the years, particularly in certain markets. We've also looked at data in terms of pet ownership, and demographically, we see the structural improvements, I would say, even compared to a very strong basis to begin with. If you look at pet ownership with respect to Gen Z and millennials, and they're prioritizing pet health, that certainly bodes well. Also we're seeing more adoptions at higher income households, if you look at what adoption numbers look like over the last number of years, which again is structurally very positive for the industry.

[Wetteny Joseph, EVP and CFO at Zoetis]

As we've taken price over the years, we took about 5% price on in companion animal this year, overall for the company, we've been running about 3% net, given some of the lifecycle dynamics, particularly Jackson generic competition. We have been able to take price, yet we still continue to see strong volume growth across the business. To Kristin's point, that's largely driven as well by innovation in the space. We continue to see elasticity in terms of ability to take price at or above what we see from an inflationary perspective.

[Operator]

Our next question comes from Elliott Wilbur of Raymond James.

[Elliot Wilbur, Equity Research Analyst at Raymond James]

Thanks. Good morning. Just a follow-up question for Kristin around parasiticide trends in the quarter. Can you maybe just talk about category growth overall? It seemed like some of the metrics out there suggested that overall category growth had actually been down, and obviously Trio continues to perform extraordinarily well, particularly in the U.S. But I'm just you know, thinking about the second half of the year and then early next year with a potential entrant, you know, what you're seeing in terms of category growth, and if you could just give us the number in terms of where Simparica is with respect to overall category.

[Elliot Wilbur, Equity Research Analyst at Raymond James]

share in the category. If I could just get a quick follow-up in here on Librela. Obviously, the initial EU experience has been quite positive here. I think you mentioned that 40% of pets were new to therapy. Just wanted to get maybe an update in terms of what you're seeing with respect to persistence, some of the pets that started therapy initially, and sort of, you know, what kind of persistence rates you're seeing sort of six to seven months after beginning therapy. Is that 40%, is that sort of a normal number in terms of new pets coming into the market, or should the takeaway there be that Librela sort of has really kind of elevated the overall category growth? Thanks.

[Kristin Peck, CEO at Zoetis]

Thanks, Elliot. I'll start with your Librela and see if maybe Wetteny can add anything on the pricing point. You know, really good questions there on Librela. You know, if you look at the 40% new to the category, we do think that's extraordinary. This is an established category. This isn't like Derm when we started it, where it wasn't really a category. There have been many products across the globe for dogs for pain management. I think it really underscores the challenges with the existing therapies. You know, the trade-offs in safety and efficacy have been significant. Most of those therapies you can't stay on for very long.

[Kristin Peck, CEO at Zoetis]

I think, so for a lot of people that, you know, really didn't wanna, you know, deal with some of those, you know, side effects, they had stayed out of the category. I think with something with the label that we have, with a monoclonal antibody, we are clearly bringing new people to the sector, and we're growing that sector significantly. I think we talked about before, the global market, for pain for dogs was around $400 million. We believe, with the addition of Librela, that we can double the size of that market over time and move that to $800 million, and we think we can do that from a few ways, and one of them you referenced. One is people staying on therapy longer.

[Kristin Peck, CEO at Zoetis]

You know, certainly with a safe and efficacious product, we believe we can increase days on therapy. I think we can also, as we demonstrate with the 40%, increase the number of pets getting it. Third, we think we can grow the market certainly based on price. This is a premium product with significant innovation. We are really, you know, pleased with the 40% growth. It is certainly higher than even we were expecting with the new patients to the category. We are seeing significant, you know, probably higher than we were expecting initially compliance in the sense of months on therapy. We remain extremely optimistic about EU and the persistence of this growth. I'll let Wetteny take your follow-up question on parasiticides.

[Wetteny Joseph, EVP and CFO at Zoetis]

Yeah. When we look at the category, broadly speaking, clearly Trio grew 72% in the quarter. If you look at our overall Simparica franchise grew 47%, right? If you look at Simparica, not Trio, but Simparica internationally, it grew 23% in the quarter. We have the broadest offering in terms of parasiticides in the industry, and clearly the only triple combination in the U.S. What we are seeing is, categorically, we're seeing a shift from topicals and collars to oral medications.

[Wetteny Joseph, EVP and CFO at Zoetis]

If you look at triple combination in the U.S., one of the interesting, you know, statistics that we've seen is that on Trio, about 30% of the dogs that are coming on Trio are new to the category, not having been prescribed a prescription parasiticide in the prior 18 months or so. We do see significant room to continue to expand in this space. As competitors come into this space, there'll be more DTC that will drive even more patients to the clinic, which is beneficial for us as well, given our relationships across corporate accounts and so on. We'll benefit from having more voices out, driving more patients into the clinic. We're not seeing a slowdown in the category.

[Wetteny Joseph, EVP and CFO at Zoetis]

There is a bit of a shift from the topicals and collars into orals, and that benefits us given our premium products.

[Operator]

Our next question comes from Balaji Prasad of Barclays.

[Balaji Prasad, Director at Barclays]

Hi, good morning, and congratulations on the results. Two from me. Firstly, as we start to lap the impact of generics on Draxxin and Zoamix, would you still count threat of genericization as a top two or top three challenge over the next two years? If you could also add some broader comments around the percentage of your portfolio exposed to generic competition over this period. Also on diagnostics, operational decline of 9%, it seems to be the Q1 of decline after Q2 2020, and in contrast to your peer results. Wondering what kind of increased spending activity, you noticed that you've been calling out over the past few months, and any metrics that you can direct to between point of care or reference labs that helps us understand this performance. Thank you.

[Kristin Peck, CEO at Zoetis]

Sure. I'll start with your diagnostics, and then I will let Wetteny, you know, sort of do the Draxxin livestock question. You know, if you look at, we're about flat in the first half of the year in diagnostics, and as Wetteny mentioned in his remarks, as you saw the decline, really, there was growth in international. We made a huge investment in creating a standalone diagnostics field force and technical team, and service team in the U.S. That is highly disruptive, as you know, as you watch other companies do this over time. But we do believe in the absolute strength of this business long term, investing in it long term. As you've seen, we've invested in innovation, in our Imagyst platform, et cetera, to grow this business.

[Kristin Peck, CEO at Zoetis]

You know, obviously as they get into new territories, et cetera, there's obviously some disruption that happens there. This, you know, honestly, was anticipated. You know, we remain extremely optimistic in the growth of this business, and the strength of it, as we certainly look at the strength of our international business and how well that's been doing, in growing that with customers. You know, we're invested in diagnostics for the long term, and really believe we can drive strong growth here. Diagnostics as a sector grows faster than the overall animal health space, and we believe we can bring disruptive innovation to the space to help us drive that. I'll let Wetteny take the follow-up question on livestock and Draxxin.

[Wetteny Joseph, EVP and CFO at Zoetis]

Yeah, sure. If you look at Draxxin, right, that was the largest product that we have across our livestock portfolio. Beyond that, there isn't any other product that's even nearly that size. In my opinion, as we look across our portfolio, clearly as well in companion animals, there aren't products that are anywhere near any sort of LOE. We would not anticipate, after the first two years that the generic competition element will be the key driver here, in the business. As we said, we expect livestock to be returning back to sort of normalized growth in the 2023, 2024 timeframe, is what we would expect, in that regard from a genetics standpoint.

[Operator]

Our next question is from Chris Schott of J.P. Morgan.

[Ekaterina Sokolova, VP at J.P. Morgan]

Hi, this is Ekaterina on for Chris Schott from J.P. Morgan. Thank you so much for taking our questions. My question is on the macroeconomic environment here. Are you seeing any notable differences when it comes to pet owner demand across geographies? Europe appears to be getting hit harder by some of the challenges related to fuel costs and food prices and stuff like that. I was wondering if you're starting to see any changes in behavior in that market. Thank you.

[Kristin Peck, CEO at Zoetis]

Sure. Thanks, Ekaterina. Good to have you on the call today. As you look at the sort of macroeconomics, you know, we continue to see, you know, on a global basis, very strong demand. I think what's driving that for us is the innovation that we bring to the market, as well as, you know, who's adopting some of these dogs, Millennials, Gen Z, who are, you know, more willing to spend more on their pets, as well as more of the pets being adopted by high-income families. You know, that being said, Ekaterina, as you double-click into individual markets, you know, you are seeing, you know, as economies get affected, you know, obviously overall, you know, demand may go down, but we have so far not seen it in our products. We are monitoring it carefully.

[Kristin Peck, CEO at Zoetis]

I think the one place, you know, where we're starting to see a little bit more of that might be Latin America, just given some of the really hyperinflationary markets that you're starting to see there. What we've really been pleased about in companion animal is the continued strength in willingness to spend and investing in innovation, disruptive technology. You know, there are certainly differences, you know, as you get into individual markets across the globe, but overall, continued strong demand. I would double-click for you in, you know, since you asked a global question in a few places. You know, one in Brazil, where we only printed about 1% growth in Q2 overall, companion animals still grew 35% in the quarter. You look at China, where we only had 3% growth, companion animal grew 24%.

[Kristin Peck, CEO at Zoetis]

Even in what many people might consider emerging markets, we are still seeing incredibly strong demand for our products and for our innovation.

[Operator]

This does conclude our question and answer session for today. I'd be happy to return the call to our host for any concluding remarks.

[Kristin Peck, CEO at Zoetis]

Great. Look, thank you everyone for your questions and for your continued interest in Zoetis. You know, just to summarize, we see continued strength across our diverse global portfolio, especially in our companion animal and pet care products. We are continuing to invest in talent, in innovation and manufacturing expansions that can support our future growth. We are updating and narrowing our full year guidance to reflect a positive outlook for the remainder of 2022, and obviously, as many other companies, the negative impact of recent changes to foreign exchange rates. I look forward to keeping you updated on future calls. Thanks so much. Have a great day.

[Operator]

This does conclude the Zoetis Q2 2022 Earnings Conference. You may now disconnect your lines, and everyone, have a great day.

Participants

Executives

• Kristin Peck, CEO
• Steven Frank, VP of Investor Relations
• Wetteny Joseph, EVP and CFO

Analysts

• Balaji Prasad, Director at Barclays
• Christine Rains, Healthcare Equity Research Associate at William Blair
• Ekaterina Sokolova, VP at J.P. Morgan
• Elliot Wilbur, Equity Research Analyst at Raymond James
• Erin Wright, Senior Equity Research Analyst at Morgan Stanley
• Jonathan Block, Managing Director at Stifel
• Louise Chen, Senior Research Analyst at Cantor Fitzgerald
• Michael Ryskin, Managing Director at Bank of America
• Nathan Rich, Research Analyst at Goldman Sachs