Zoetis Inc.

Welcome to the fourth quarter and four-year 2018 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. It 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-1 on your touchtone phone. 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-0. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Good morning, everyone, and welcome to the Zoetis fourth quarter and full year 2018 earnings call. I am joined today by Juan Ramon Alikes, our Chief Executive Officer, and Glenn David, our Chief Financial Officer. Before we begin, I will 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 NCC filings, including but not limited to, our annual report on Form 10-K and our report 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 U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's eight-day filing, dated today, February 14, 2019. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Juan Ramon. Thank you, Steve.

Good morning, everyone. Our 2018 results, once again, confirm the strength of our business and our leadership in the animal health industry. We delivered another year of strong performance and executed our investment plan to continue to strengthen our portfolio across the continuum of care. Our successful innovations, the high quality of our manufacturing, our -in-class effort, and the diversity of our portfolio has been driving our steady revenue growth over the past years. Since we became a public company in 2013, we have consistently grown revenue faster than the market. And this revenue performance has been achieved while significantly improving our profitability. With our adjusted EBIT margin increasing from 24 percent in 2013 to 35 percent in 2018. In 2018, we delivered our sixth consecutive year of operational revenue growth. Ten percent overall, with organic operational growth of eight percent, which excludes the revenue related to our abaxes acquisition. In terms of organic revenue drivers, we achieved our strongest growth in our dermatology process. We have a strong portfolio, vaccines and parasitic sites. Meanwhile, our anti-infective and medicated feed additives show more modest growth. And this was because of regulatory changes around the use of antibiotics in animal production. For the second year in a row, our growth base of about 300 products and product lines generated operational revenue growth across all our core species and major markets. We expect our 2018 organic growth to once again outperform the market and deliver our valuable position of growing in line with or faster than the animal health market. We also increased profitability faster than revenue growth for the full year, growing adjusted net income by 31 percent on an operational basis, consistent with our valuable position. This improvement was driven by higher revenue, improved cost structure and tax reform. In 2018, we achieved other important milestones that will support our future growth and success. Apocwell, our largest product by revenue, achieved $464 million in sales in 2018, an increase of 28 percent from 2017. We added two new blockbusters to our portfolio in 2018, bringing our total number of products with more than 100 million in annual sales to 12. Our oral parasitic size Symparica and our monoclonal antibody for dermatology Cytopoint each exceeded $100 million in sales for the first time, with $158 million and $129 million in annual sales respectively. We also introduced critical new lifecycle innovations that keep our portfolio updated and competitive and support the durability of our major global franchises. For example, Prospera Gold, PCVMH, our latest swine vaccine, was introduced in the U.S. and Canada to provide greater options and flexibility in protecting pigs from diseases. We also built on the Sarlaner compound in Symparica to develop a Revolution Plus, a topical parasitic site for cats that was recently approved in the U.S., Japan and Canada. Combines two ingredients, Sarlaner and salamectin, and is already marketed in the European Union as Stone Cold Plus. All these new products and lifecycle innovations demonstrate the excellent return on our investments in R&D. We also took important steps to expand our manufacturing capacity. In the U.S., we enlarged our production facility for poultry vaccines in Charles City, Iowa, and our expansion in Kalamazoo, Michigan is progressing ahead scheduled. With the first commercial batches of oral solid dose medicines expected to be delivered to customers by the middle of 2019. Outside the U.S., we expect to complete the construction of a vaccine manufacturing facility in Shushu, China by the end of 2019. And we acquired a facility in Tala, Ireland, to help increase the supply for our market-leading bovine seed sealants that help protect cows from mastitis infections. During the year, we made our largest acquisition to date, purchasing a box for $2 billion. In the fast-growing -of-care dynostics space, we see dynostics as an important area to broaden our portfolio. And with tremendous growth opportunity ahead, especially in international markets. We also acquired Smart Boat for its sensor technology and monitoring systems, which will be essential to our expansion in the precision livestock farming and other digital and data analytics solutions that are emerging in animal health. And we returned excess capital to our shareholders. In December, we announced a $2 billion multi-year share reporters program and the increase of our quarterly dividend by 30%. Looking ahead in 2019, we will continue investing to generate short and long-term growth. We support our key dermatology and parasitic side products with -to-consumer advertising and promotional campaigns to advance care penetration and launches in new markets. In the U.S., we will be launching two new products in our companion animal lab business, Evolution Plus, the topical parasitic side product that I mentioned before, has launched this quarter. And pending FDA approval this year, we would expect to launch a new injectable formulation to protect dogs against heartworms for up to 12 months. In terms of R&D, our pipeline remains very strong and we expect to see more progress in 2019. Potential filing for new products and continuing market expansions of major products like Cytopoint, Symparica and Apocall, which is expected to launch in China this year. In 2018, we will continue our work on new monoclonal antibodies to manage pain in dogs and cats, as well as for dermatology in cats. We are making good progress with our research programs and we feel very positive about the potential this type of treatment offers for greater compliance, convenience and efficacy for a different species. This remains an area to watch as we invest further internally and we build on our partnership with Regeneron in this space. As I have mentioned in previous communications, the application for our new three-way combination parasitic site, composed of Symparica and two other active ingredients, has been filed in the U.S. and with the European Medicines Agency and, if approved, we still anticipate income into market in 2020. Additionally, we will be investing more in research for diagnostics, devices, digital and data analytics technologies that can be integrated with our core portfolio of medicines and vaccines. Diagnostics for livestock are a promising long-term opportunity and areas such as sensor technology, monitoring systems and other digital applications for animal health will be receiving more investment. In terms of our deeper commitment to diagnostics, we look forward to a full year of selling a more robust portfolio of -of-care diagnostic instruments, consumables and test kits. We are seeing great progress with integration of the legacy of vaccine-surfing force in the U.S. And outside the U.S., we are building the infrastructure, sales and technical teams needed to support our diagnostic portfolio. Moving into market projections for 2019, we expect the overall industry to grow approximately 5%, excluding the impact of foreign currency. The swine market, companion animal market and poultry are all expected to be somewhat in line with market growth. The cattle market growth is expected to be more limited based on the challenging market conditions for beef and dairy customers. For varieties, we expect to grow faster on the market for companion animal and swine based on our new products and to grow in line with the poultry and cattle markets. We announce our full year 2019 guidance today, and we are expecting organic operational revenue growth of 4.5 to 6.5%, excluding a 3% exit point contribution from vaccines. Operational growth for adjusted net income is expected to be in the range of 8 to 11%. In 2019, we are committed to investing net profits to generate short and long-term growth while returning excess capital to shareholders. In conclusion, our strong performance in 2018 is based on our diverse portfolio, our leadership innovation and customer experience across the entire cycle of care. In 2018, we have invested to support the growth of our core business as well as involving spaces like diagnostics, devices, digital and data analytics. We expect to build on this strategic approach to our growth in 2019 while delivering on the full year guidance. With that, let me hand things over to Glenn, who will provide more details on our 2018 fourth quarter results and full year 2019 guidance.

Thank you, Juan Ramon, and good morning, everyone. As Juan Ramon noted, we had another exceptional year in 2018 with strong performance in both revenue and adjusted net income. Revenue exceeded our guidance, and adjusted net income was in line with the high end of our range. We expect our 2018 organic growth to again outperform the market once industry figures are finalized, delivering on our value proposition of organically growing revenue in line with our market and growing adjusted net income faster than revenue. Revenue for the full year 2018 was $5.8 billion with both reported and operational revenue growth for the year at 10%. Excluding the impact of the ABACSIS acquisition, operational growth for 2018 was 8%. Of this 8%, 3% comes from price and 5% from volume. Included in the volume growth were contributions from our key dermatology portfolio of 2%, new products including Samparica of 2%, and inline products of 1%. Adjusted net income for the full year was $1.5 billion, representing reported growth of 29% and operational growth of 31%, driven by revenue growth, gross margin improvements, and a lower effective tax rate. In 2018, we grew our business operationally across all core species, therapeutic areas, and major markets. Our key dermatology portfolio and Samparica continue to grow and gain additional market share both in the U.S. and internationally. For the full year, we recognized combined revenue of $593 million for AppleQuill and CiderPoint. This portfolio continued to grow rapidly in 2018 and is well positioned for future growth heading into 2019. For livestock, our diverse portfolio of products drove growth across both developed and emerging markets, capitalizing on industry trends of higher protein consumption and improved productivity. Turning to the fourth quarter, reported revenue growth was 7%, which includes a negative 4% in the U.S. tax on foreign exchange. Currency depreciation in Brazil continued to be the largest driver of the unfavorable foreign exchange impact in the quarter. Operational revenue growth in the quarter was 11%. Excluding the impact of the Baxis acquisition, operational revenue growth was 7%. Of this 7%, 3% comes from price and 4% from volume. Included in the volume growth are contributions from our key dermatology portfolio of 2% and new products including Samparica of 2%. Q4 represents the first full quarter of a Baxis-related revenue being included in Zoetis results. We recognized $65 million in legacy of Baxis products, contributing 4% growth to overall Zoetis in Q4. These results included destocking of wholesaler inventories in the U.S. as we normalize wholesaler inventory levels to be consistent with the rest of our business. New products including Samparica, Stronghold Plus, and PCV Combo vaccines were also growth drivers in the quarter. Samparica generated $32 million in global sales this quarter, representing operational growth of 90% over last year. Equine's Core EQ Innovator, the first and only vaccine to contain all five core Equine disease antigens, also launched in 2018 and has helped to drive operational revenue growth of 12% in Equine for the quarter. Our key dermatology portfolio, comprised of AppleQuo and Cytopoint, also continued strong performance this quarter with sales of $156 million, a 25% increase over the prior year. Adjusted net income for the quarter grew 21% operationally, driven by revenue growth, discrete other income items, and a lower effective tax rate. Now let's discuss Zoetis segment revenues for Q4. Beginning with the U.S., revenue grew 14% in the fourth quarter, including 6% growth due to Legacy of Axis products. Including the impact of the Abaxis acquisition, Companionimal grew 26% while Lifestock grew 3%. Companionimal sales in the quarter were driven by sales of Legacy of Axis products, our key dermatology portfolio, and new products including Samparica. Certain inline product declines, due to competitive pressure, partially offset these increases. Excluding the impact of the Abaxis acquisition, Companionimal growth was 14%. Key U.S. dermatology sales were $110 million for the quarter, with both AppleQuo and Cytopoint exhibiting significant growth over the prior year. Samparica also had another positive quarter, with U.S. sales in the quarter nearly doubling over the last year. Revenue growth continued due to increased clinic penetration and market share resulting from our field force selling efforts. Partially offsetting growth in our Companionimal business were declines in Rimidu and Clavimoc due to anticipated competition. The U.S. Lifestock business delivered growth across all species in the fourth quarter. As a reminder, this growth calms off a strong fourth quarter in 2017. In the cattle business, we continue to see challenges in both the beef and dairy segments. However, growth was primarily due to higher sales of premium products as well as competitive supply constraints in the quarter. In poultry, the Zouettis portfolio of alternatives to antibiotics and medicated feed additives continue to be a solid contributor to growth as we saw additional market expansion of no antibiotics ever production. Overall, the U.S. demonstrated another strong quarter with growth across all species. Turning now to our International segment. Revenue grew 5% operationally in the fourth quarter, including 1% growth due to Abaxis legacy products. Including the impact of the Abaxis acquisition, Companionimal operational growth was 14% and operational growth in livestock was 2%. As a reminder, international markets faced a headwind of four fewer calendar days this quarter, resulting from the change in our accounting calendar implemented this year. Full year operational revenue growth of 9% was not impacted by calendar days and provides a more accurate indicator of international performance. Companionimal product growth was driven by the addition of legacy Abaxis products, new products such as Simparica and Stronghold Plus, our key dermatology products, and increased medicalization rates in key international markets. Livestock growth was driven by poultry, swine, and fish, while cattle was relatively flat in the quarter. The complete quarter and annual results of our top 11 international markets are provided in the table included in our earnings release, but I would like to highlight a few items for the quarter. In Brazil, sales grew 8% operationally, with Companionimal growing 22% and livestock growing 4%. Companionimal revenue in Brazil benefited from growth in vaccines due to improved supply and key products, primarily Simparica and Apple Quill. Livestock benefited from damp weather conditions, which increased the use of cattle parasiticide, as well as expanded usage planes on vaccines, which helped drive premium pricing. Moving on to China, we had another great quarter, where our revenue was 16% operationally, largely due to continued growth of Companionimal products, primarily vaccines and parasiticides. Canada grew 10% operationally, with balanced growth between Companionimal and Livestock. Companionimal growth was driven by the inclusion of Abaxis Legacy products, as well as growth in Apple Quill. Livestock benefited from sales of new products such as swine and strong performance of key brands in cattle. Other emerging markets also performed well in the quarter. Summarizing international performance, the addition of Abaxis Legacy products, continued growth of new products, and diversity across our portfolio all contributed to another solid quarter for our international segment, despite the impact of fewer calendar dates. Now moving on to the rest of the P&L. Adjusted gross margin of .4% decreased approximately 250 basis points in the quarter on a reported basis versus the prior year. The decline this quarter is primarily due to the unfavorable impact of foreign exchange, a full quarter of Abaxis-related revenue included in our results, and increased inventory charges. The declines are partially offset by strong revenue growth and continued cost improvements and efficiencies in our manufacturing network. The Q4 margin is not indicative of the gross margin we anticipate going forward. Total adjusted operating expenses, including the impact of the Abaxis acquisition, grew 15% operationally. The increase is primarily related to the acquisition of Abaxis and additional spend in R&D, including investments in monoclonal antibodies, for chronic pain, and other pipeline programs. The adjusted effective tax rate for the quarter was 17.3%. This tax rate is significantly lower than the rate from the comparable 2017 period due to the favorable impact of U.S. tax reform and discrete items recognized during the quarter. Adjusted net income for the quarter grew 21% operationally through a combination of strong revenue growth, favorability in other income, and a lower effective tax rate. Adjusted dualist DPS grew 25% operationally in the quarter versus the same period of 2017. Our income growth and balance sheet disciplines have enabled us to continue increasing operating cash flow. Inventory improvements are one area I am particularly pleased with, having decreased months on hand since 2016 by more than two months. The current level of less than nine months on hand is consistent with industry standards, and we expect we will continue around this level going forward. The significant improvement in inventory has released approximately $300 million of cash from our balance sheet since 2016. Now moving to guidance for 2019, we are committed to our value proposition of growing revenue in line with or faster than the market, and growing adjusted net income faster than revenue. Before I get into the specific numbers, please note that you can find our guidance table included in the press release as well as the investor slides. Also note that all foreign exchange impact is based upon exchange rates as of late January. In 2019, we are projecting revenue between $6.175 billion and $6.3 billion, reflecting operational revenue growth of .5% to .5% over 2018. Foreign exchange is expected to reduce revenue growth by approximately 1.5%. Our organic operational revenue growth, which excludes the impact of the Abaxis acquisition, is projected to be between .5% and 6.5%. In addition to Abaxis legacy products, our key dermatology portfolio and new products will be strong contributors to growth in 2019. From a species perspective, we expect companion animals to grow at a faster rate than livestock driven by the Abaxis acquisition, continued growth in our key dermatology and parasiticide portfolios, increased medicalization rates in emerging markets, and market dynamics, including growth in per-pet spending. From a geographic perspective, US and international markets will contribute balanced growth. Adjusted cost of sales as a percent of revenue is expected to be in a range of 31% to 32%. The expected improvement over 2018 is driven by price increases and manufacturing cost reductions, partially offset by the impact of the Abaxis acquisition and currency movement. We expect adjusted SG&A for the year to be between $1.47 billion and $1.52 billion. We anticipate foreign exchange to reduce growth by approximately 1% on a recorded basis. Operational growth in SG&A reflects a full year impact of the Abaxis acquisition, as well as investments in our Diagnostics International Field Force and Technical Service teams. We will also continue to fund strategic investments that have demonstrated a strong return, including direct to consumer advertising for Apple Quo and Symparesis. Moving on to R&D, we expect 2019 expenses to be between $445 million and $465 million. Consistent with 2018, we have committed to an increase over 2018 in R&D spending to ensure we are well positioned to capture future short-, medium-, and long-term growth opportunities in critical spaces. These spaces include a new combination of parasiticide, monoclonal antibody therapies for pain in cats and dogs, and new vaccines for poultry. We will also continue to invest in the next wave of diagnostic innovation, building on our existing Zoetis and newly acquired diagnostic platforms to ensure we are delivering -in-class -of-care diagnostic solutions. The increase in adjusted net interest expense and other income deductions is related to our 2018 debt offering, primarily used to fund the Abaxis acquisition. Our adjusted effective tax rate for 2019 is expected to be within the range of 20% to 21%. The increase over 2018 is related to the impact of favorable discrete, non-recurring items in 2018 and the impact of the guilty tax, which is effective for us in 2019. We project adjusted net income in the range of $1.65 billion to $1.7 billion, representing 8% to 11% operational growth. While we do not provide specific guidance on cash flow, we anticipate that in 2019 operating cash flow will decline compared to 2018. As mentioned previously, we have significantly decreased our inventory months on hand to be in line with industry norms, which has provided a significant cash flow benefit in the last two years. In 2019, we expect to maintain our current levels of months on hand, and as a result, we will not have the benefit of a working capital release in our cash flow. In 2019, we also expect an incremental increase of approximately $100 million in capital expenditures for information technology and manufacturing to support our recent acquisition, improve our cost efficiencies, and increase capacity. In terms of our capital allocation priorities, we continue to focus first on internal, commercial, manufacturing, and R&D investments, then business development opportunities, and finally returning excess capital to shareholders. We recently announced an increased growth dividend for Q1 2018 of 30%, in line with our 2018 earnings growth, and we also announced a new $2 billion multi-year share repurchase program resulting from our consistent performance, financial discipline, and the strength of our business model. Finally, we expect adjusted diluted EPS will be in the range of $3.42 to $3.52. Our range for reported diluted EPS of $2.83 to $2.99 includes purchase accounting, a back to back acquisition related costs, and certain significant items. I'd also like to remind you that while we take a long term view of our business and prefer to focus on annual rather than quarterly results, there are some considerations I want to point out for 2019 within the quarters. The full year impact of the back to back acquisition will have a disproportionate impact on growth across the P&L in the first half of 2019 and partially in Q3. In addition, foreign exchange will negatively impact growth in the first half of the year by approximately 400 basis points in Q1 and 300 basis points in Q2 in revenue. Now to summarize before we move to Q&A. 2018 was another strong year delivering top line operational growth of 10% and bottom line growth of 31%, demonstrating once again that the WED is committed to delivering on its value proposition. We also remain committed to creating shareholder value, returning more than $900 million to shareholders in 2018 through dividends and share repurchases. We expect to continue delivering on a value proposition in 2019, driven by solid growth in our core business and increased contributions from the legacy of Daxus portfolio of diagnostic products. Finally, in 2019, we will continue to invest internally and externally to grow profitably in the short, medium, and long term. Now I'll hand things over to the operator to open the line for your question.

Operator? And at this time, if you'd like to ask a question, please press star one on your touch tone phone. 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. Thank you. We'll take today's first question from Michael Riskin with Bank of America Mural Lynch. Please go ahead. Your line's open.

Thanks, guys. Appreciate taking the call. Congrats on the quarter. A couple of quick questions. First one, you talked about 5% market growth for the oral industry in 2019. I just want to go into that a little bit deeper because in the past, we've seen something more in the five to six range. So I'm wondering what you're seeing there. If you could give a little bit more color on the dairy markets, cattle markets in the US, some of the swine issues we're hearing about internationally. And where I'm getting at with this is what should be our expectation for the inline portfolio in 2019? If you exclude a Bax, if you exclude the dermatology portfolios in Perica, what's the base portfolio doing in terms of volume and price? And then I've got a quick follow up question on the margin expansion for 2019.

Thank you, Mike. I will try to cover some of the questions also. I will ask Glenn to provide some additional details on how we can see the growth, the inline growth in 2019. So I agree that in previous communication, I mentioned that we're expecting the market growth of 5% to 6%. Since then, we have seen that the cattle market, especially in the US, in both beef and dairy, has been showing some weakness. And we expect that rather than 5% to 6%, now we are projecting the total market growth of 5%. We still expect that the cattle business worldwide will be showing growth, but definitely a growth that will be below this 5%. The rest of the species, as I mentioned in my comments, companion animal and also swine and poultry will be growing inline or slightly above the market. And the only species that we see some market growth below the market will be cattle. Then moving into the details of the organic growth, as part of our guidance, it's .5% to 6.5%. And then Glenn can provide a little bit more details of how much will be price growth and also volume and growth and new products. In terms of just

the overall breakdown, it's really consistent with our long-term expectations. We expect to generate around 2% price this year. We're particularly strong with price at 3% for 2018 going to 2019, probably more inline with our long-term proposition of around 2%. New products, again, consistent, probably 1% to 2%. And then the remainder comes from the inline portfolio. We do consider Durham part of the inline portfolio as it has matured and has been on the market a number of years at this point. Also, in terms of your question on margin expansion, when you look at where we closed 2018, cost of goods sold as a percent of revenue was a little over 32%. Our guidance for 2019 is 31% to 32%. And we made significant progress in cost of goods in 2018, improving our cost of goods as a percent of revenue by over 100 basis points. So that leaves about another 100 basis points to deliver our commitment of improving cost of goods sold as a percent of revenue by 200 basis points by 2020. You'll probably see that spread between 2019 and 2020, that attainment.

Thank you. Next question, please. And we'll go next to Kevin Ellis with Craig Hallam. Please go ahead.

Good morning. Thanks for taking the question. So I just wanted to start off on the cost structure. Looks like some expenses this quarter came a little bit higher than we expected. And then Glenn, you made comments about where you think things will line up in 2019 with increased investments in R&D. Can you just talk about some of the moving parts and given how good the year was for you in 2018, did you pull forward any expenses or how should you be thinking about that?

So Kevin, in terms of cost of goods, I'll emphasize again, we had significant improvement this year of 100 basis points in improvement in cost of goods. For Q4, we did see elevated cost of goods. And that was really related to the impact of FX, also BACTAs and higher inventory right off in the quarter. Really, the Q4 should not be viewed as a run rate for 2019. We have good visibility into our cost of goods. And we're confident in the guidance of 31% to 32% for 2019. As we look into 2019 from an expense perspective, consistent with what we said, we are making investments in R&D. And R&D is growing more in line or closer to revenue. As we do have many projects that we're very excited about in our pipeline that we want to make sure that we fully fund. SG&A, when you look at the operational growth, is growing below revenue, even with the investments that we're making in a BACTA. Thank you. Next question,

please. We're going next to Erin Wright with Credit Suisse. Please go ahead.

Great. Thanks. Can you speak to the underlying performance that a BACTA and how the integration is progressing in the longer term cross-selling opportunity with the diagnostic portfolio? And then my second question is on Simperica Trio. Do you think there's a possibility that you're first to market there in that category? And how do we think about your competitive positioning there? And do you still feel confident in the 2020 timeline? And do you anticipate one or two review cycles from the FDA? Thanks.

Thank you very much, Erin. I will start with the comments on the BACTA integration. Glenn will also provide some details of BACTA's performance. And then I will also talk about Simperica Trio. In terms of BACTA's integration, things are progressing in line or even in some cases faster than initially planned. In the US, both teams, BACTA's legacy team in the field force and also our teams, are already working together. And as we communicated initially, the SREGIS team is really identifying the opportunities and also helping the other team also to identify customers to complete the sales. They will be also engaged in ensuring that we increase the use of the controls. And this will be an opportunity for future growth. We are working definitely that in the future will be not only the teams that are working together but also the portfolio will be fully integrated. And this also is depending on some of work that we are doing in terms of the SET implementation for BACTA's operations. That we plan to do it in 2019. In international markets, we are also progressing very well. We have almost completed the hiring process of field force and also technical support. We still have some positions that will be completed in the next coming month. But this team is already working together with the field force team of SREGIS. Generating the demand. In most of the markets, the supply to customers will be still done through third party distributors. In 2020, we will be deciding if we keep the distribution or we go direct in some of the opportunities or integration plans are progressing very well. We are also working on continuing identifying opportunities in terms of R&D. And this scenario that also we are integrating the teams of cities in Kalamazoo, also in Denmark and in Union City. All together are defining the future portfolio of SREGIS in both company animal and livestock. Glenn, do you want us to read the details of ABACS's performance?

In terms of performance for the quarter for ABACS, as we mentioned, we had $65 million in sales for the quarter. I want to remind you that ABACS was on a different calendar. But however, if you do normalize the accounting calendar, that would translate to approximately 8% growth. Again, within the quarter, we did have some de-stocking to bring ABACS more in line with our overall levels of inventory with wholesalers. If you adjust for that de-stocking, the growth for the quarter is double digits. Also for the year, again, if you try to look at it on an apples to apples basis, the growth is double digits for the year with and without the de-stocking.

Thank you, Glenn. And then moving into the triple combo. So let me maybe provide a little bit of context. So when we launched Symbarica as a single agent, we were two or three years behind competitors, Nesca and Preveto. Now with the triple combo, we don't know it will be first and second to market. But what we did is significantly reduce this gap of two or three years. And then we expect that if FDA approval is coming in line with our filings and expectation to introduce this policy in 2020. So even if we are second to market, we'll be only second with a few more different with the competitors, which is a significant improvement compared to the situation that we have with Symbarica. And with Symbarica, we have been able to continue growing patient share. In 2018, we increased the patient share from 13.1 at the end of the year to 15.6 at the end of the year. So we are confident that with the efficacy and also the safety profile of Symbarica and the future efficacy and safety profile of triple combo, we have the opportunity to have a significant market share.

Next question, please. And we'll go next to Louise Chen with Canter Fitzgerald. Please go ahead.

Hi, thanks for taking my question. So my question here is, can you talk more about your pipeline as it pertains to the MAPS, livestock diagnostic and aquaculture? When will some of these new products hit the market? Do they have the potential to be blockbusters or an aggregate to be blockbusters? And then just a quick follow up on the triple combo. Is that expected to be a blockbuster product for you as well? Thank you.

Starting with the easiest question. Thank you, Louise. It's definitely triple combo. It's expected to be a blockbuster. Definitely Symbarica is already a blockbuster, but we expect also that the triple combo will reach these status. In terms of the rest of the pipeline, definitely there are programs for livestock. These programs, there are a lot of programs that maybe in aggregate basis will represent a significant growth opportunity, but I will not describe these programs as probably in livestock as a blockbuster potential. But actually it will help us first to protect the current portfolio and second to bring innovation in livestock into the market. In terms of monoclonal antibodies or chronic reflux, we expect that this will have the opportunity of being a blockbuster and we are convinced that the monoclonal antibodies for dogs and cats will represent a significant opportunity for treating dogs and cats in a different way that there is today with the NSAID, especially for cats, that there is nothing especially developed for these animals in terms of pain. We also are excited about the opportunity of developing a monoclonal antibody for dermatology in cats. Again, it's an opportunity that we expect that will be coming in the next years and it will be expressing our current portfolio also moving to another species with a monoclonal antibody. Next question, please. Go next to John

Krieger with William Blair. Please go ahead. Hi, good morning. This is John Kaufman on John Krieger. A couple questions on cattle here. You mentioned premium product sales in the US. Is that a trend that you foresee continuing in spite of market weakness? And then internationally, where are we in the cycle in some of the key markets? Looking out beyond 2019, can international growth more than offset US weakness? What are your expectations for long-term growth in this market? Thank you.

Definitely the US market for cattle has been driven by our premium products. Some of our products, they face competition during the year, especially when the situation of the animal was of lower risk profile. But we also have seen that in a risk situation, our premium products are the best products that we need to protect or to treat animals. So we are confident that our premium products also will remain generating growth in the future. In the US, definitely we see the cattle business growing below market and maybe also growing below what we expected some months ago. Because we also projected daily recovery in the second half of 2018, then we think that it will take even longer to see a recovery on the daily business. In the case of beef, I think we'll be always cycles, animals moving into the feedlots sooner or later. But we don't see a significant change on beef. We're still predicting that beef will be slightly increasing the number of animals, only by 1%. But we think that beef will be probably in line with what we expected some months ago. We expect that the overall cattle business will be growing in 2019, maybe growing faster in international markets than in the US. And as we said many times, the diversity of our portfolio in species and geographies is helping us to manage these cycles. These are cycles that we have been facing forever. And one of the things that not only our industry but also Zoetis has been very consistent, even in the face of changes, cycles, regulatory situations, very consistently delivering growth in line with the market or even higher in the last six years of Zoetis as a public independent company. Next question,

please. We'll go next to John Block with Stiefel. Please go ahead.

Great. Thanks, guys. Good morning. Maybe a couple questions and I'll try to lump it into one long one. So Glenn, the 150 FX basis point headway, and I thought you messaged maybe 200 to 300 basis points recently at JPMorgan. So I just want to see if I'm correct and what, if anything, has changed there. And then on that same question, does the midpoint of the 19 EPS of 347 imply any sort of a sheer repo? I think just trying to flow through your numbers, I get towards the lower end of the EPS, if I use the 4Q share count. And then just to pivot over to Abaxis, when you guys bought Abaxis, one or more, they had a bunch of new products in their pipeline, a new urine sediment, blood gas, rapid assays. So just any more color you can give us in your control now for four or five months, how has the uptake been on some of these new products within their portfolio? Thanks for your time,

guys. So John, so I'll address the FX questions. You are correct. When we were at JPMorgan, we did see a bigger impact of foreign exchange based on the rates that were applicable at that time. In terms of the guidance that we have today, we based the guidance based on FX rates as of the end of January. And as I mentioned, based on that, there is 150 basis point impact to revenue. However, if you look at the last few weeks, the dollar has continued to strengthen. And based on the rates that we see actually as of yesterday, revenues would be negatively impacted by about another $50 million and EPS by a few pennies. So this is currently not reflecting our guidance and something that we'll continue to monitor. The other question we had was in terms of the midpoint and share repo, when we set our guidance range, we really only assume that we'll offset dilution from compensation in terms of setting our guidance, but nothing additional.

Then on the ABAX question, so the focus that we have been in the last few months since the acquisition has been to ensure that all the existing portfolio was really meeting the needs and the quality that is expected from our customers. And one of the efforts that we have been doing significantly is to make sure that our equipment are connected to the practice management system and that really helping veterinarians to have a full integration of information from different equipment in the clinics. We have also been working on defining the priorities in terms of R&D focus. We are progressing well. In terms of you're asking also about new products, well definitely the Flex4, it's working very well. We also are planning to introduce Flex4 in international markets, including Canada and some other markets. And we will provide a little bit more details on the future launches as we are making progress in terms of defining all the priorities and all the products that will be coming in the next coming years. So next question.

We'll go next to David Reisinger with Morgan Stanley. Please go ahead.

Thanks very much. I have, well first of all, congrats on the performance. I have two high-level questions. The first is with respect to Abaxis, we spoke with a consultant who suggested that it will be difficult for Abaxis to displace IDEX at many U.S. customers. Could you speak to that, your ability to knock IDEX out of U.S. customers and drive placements of Abaxis going forward? And then with respect to the FDA's assessment of heartworm drug efficacy and potential resistance concerns, could you just speak to where the FDA is in that process and whether the heartworm coverage that you're able to demonstrate to the FDA for TRIO will be at the 100 percent level or whatever level the FDA will require? Thank you.

Thank you, Dave. And well, starting with the question of heartworm, definitely we have presented to the FDA all the support of 100 percent efficacy in terms of protection against heartworm. So what is the process of the FDA? It is something that we cannot comment, but we are confident that we have submitted all the data to support our efficacy and safety profile. We'll continue working with the FDA. It's a process. It's a process of submitting different materials, information, and also responding to questions. We are confident that through the process we'll be able to introduce the product in 2020. About the question on can we gain share in the U.S., the answer is yes. And we are convinced now that Zoetis is competing with any competitor in the market on equal or even stronger conditions. In the past, there was limited in terms of access to customers, and I mentioned that maybe they were meeting or visiting their customers once per quarter compared to the other competitors having even more frequency than once in a month. Now we have the opportunity to really be in front of customers even more than once a month for three customers. Also very important, we have the opportunity also to combine all the diagnostic portfolio with our extra portfolio of vaccines, parasites, and so on and so forth, and also create a value proposition to the customers that it was not available at the time of vaccine. So I understand that there may be people that need to be convinced, but I hope and we will work in the heart to make them wrong in terms of the assessment that we cannot compete against IDEX.

Next question, please. We are going next to Chris Schott with JP Morgan.

Great. Thanks very much for the questions. I guess first one was on AboQuel. I'm just trying to get a sense of where we are in the growth cycle here. So specifically, how much more growth potential do you see for the product in the U.S. market? And when we think about the -U.S. opportunity, can you just give us a little bit more color about how uptick has trended relative to the U.S. in the markets you've launched, and what are the biggest -U.S. opportunities that you're watching? My second question was on margin expansion over time. So beyond 2019, I know you've highlighted 19th of an investment year with the BAXs coming on board and the R&D investments, but when we look beyond 19, can we think about OPEX growth returning back down to low single-digit levels, or should we think about Zoetis in a period of, you know, kind of multi-year period of OPEX investment as you look at some of these growth drivers? So again, this is beyond 19 as we think about the longer-term model. Thanks very much.

Thank you, Chris. Well, enough of both, and comments for the U.S. and also comments for international. In the U.S., we started the year with a patient share of 59%, and we ended 63%. We still think that there are opportunities of growing a patient share. Second, we still see opportunities for expanding the market. I will continue expanding the market or helping to expand the market with DTC campaigns. That will be the third year that we are investing to create these market demands. And third, we still see opportunities for pricing. So these three elements are probably supporting the growth in the U.S. for Apocoa. Definitely lower growth than what we have seen in previous years. So the product has been in the market now for four years. It will be five years in 2019. So we should expect that there will be some reduction on the growth in the U.S. International markets, well, the situation is very different. And I'm not talking about only Apocoa. I'm talking about the full-term portfolio, including Cytopoint. Cytopoint has been introduced in the market recently in some of the international markets. We expect growth in the introduction of Cytopoint. We still expect growth for Apocoa. Definitely in terms of patient share, it's below the patient share that we have achieved in the U.S. And we expect that over time reaching a similar level of patient share. Although the number of medicalized docs outside of the U.S. is lower than in the U.S. And finally, we expect in 2019 to introduce the product in China. And again, China has been a market that has been surprisingly positive in terms of growth in companion animals. Now, if I remember well, and then you can correct me if I'm not. So now China in terms of companion animals is the second largest after the U.S. Maybe another market. But the second, third, it's in companion animals growing very fast. And we expect also that Apocoa will be successfully introduced in this market. Talking about margin expansion, you want to cover this

question? There are a number of opportunities for us in terms of margin expansion beyond 2019. And just starting with cost of goods and beyond 2020 and delivering on the proposition of 200 basis point improvement in 2017. As we look past that, we should be able to continue to get improvements in our cost of goods as a percent of revenue. Really with cost of goods efficiency coming from a lot of the capital investments that we're making today, which we expect to pay off in the longer term in terms of improved cost of goods. And we'll continue to also get margin expansion from price. Looking at the OpEx lines, from a G&A perspective, we do expect general administrative expenses to grow more in line with inflation as we already have the infrastructure established in most of our markets. Selling will probably be more between the overall inflation rate and the growth in revenue, depending on the level of revenue growth that we have and new product introductions that we'll need to support. And then from an R&D perspective, that'll really depend on the opportunities that we have. But that'll probably grow more in line with the revenue than others.

Thank you, Glenn. Maybe adding to the question on a portfolio of DERM, I mentioned that one day we should be also facing competition. It's an area that DERM has created. It's not the first time that we are creating the market. We did it for pain now with DERM. But we are convinced that we have developed a significant portfolio in DERM, a portfolio which is showing a high level of efficacy, excellent safety profile. And we'll be also adding in the future monoconnectivity for the technology issues for CAT. So we are confident that we have the opportunity of continuing growing. Always we need to consider future competition in this space. Next

question, please. And we'll take today's final question from Kathy Minor with Cowan. Please go ahead. Your line is open.

Great. Thank you for taking the question. One, just a brief follow up on the dermatology area. And I apologize if I missed it, but did you give an update for your expectations for 2019 for dermatology, particularly as you've met or exceeded the 500 million plus for 2018? And the second question just on M&A, does your 2019 assumption, guidance assume any small bolt on acquisitions? And given that ABACSIS is now on board, what would be the key areas we should watch for that there might be some interest in adding? Thank you.

Thank you, Kathy. And well, in terms of the sales, peak sales for our demo portfolio, so in 2018, we almost reached 500 million.

It was

$593 million. We are projecting growth in 2019, but definitely we are not now updating in terms of peak sales. We know that in the future we have competition in this space, so it's a little bit complicated now what is the full potential. We are convinced that we still have opportunities to continue growing. And as I mentioned before, we also expect to add new products to our portfolio, monocon antibodies for cats. And maybe also working to ensure that we also apply lifecycle innovation to Apocall to protect this franchise. And this can be in terms of formulations, in terms of expansion to other species, so it's something that will continue working on lifecycle innovation. And I also ask if we are including any acquisitions in 2019 guidance, and the answer is no. So it's just our current portfolio, including Avaxys portfolio, and what we describe now as organic growth, including Avaxys. And definitely we will continue assessing opportunities in the market. We are convinced that we have the infrastructure, we have the expertise to integrate, and also we have the reach to the customers. And we will continue assessing opportunities available in the market, and if these opportunities are meeting the criteria of strategic value creation and supported by the financials, we think that we have the capacity to go and acquire other companies. And I think with that, we conclude this session. So thank you very much for attending this call. Thank you for your questions. And with that, we close this call. Thank you.

And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.