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spk14: Welcome to the third quarter 2021 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 Zulettis.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 touch-tone 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 zero. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.
spk06: Thank you, Operator. Good morning, everyone, and welcome to the Zoetis Third Quarter 2021 Earnings Call. I am joined today by Kristen Peck, our Chief Executive Officer, and Wetney 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. or list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our NCC 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 U.S. GAAPs, The 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 8K filing dated today, Thursday, November 4th, 2021. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristen. Thank you.
spk09: Thank you, Steve, and welcome everyone to our third quarter earnings call. We delivered strong results again this quarter, with 10% operational growth in both revenue and adjusted net income, driven by our innovative portfolio of pet care parasiticides and dermatology products. Our U.S. business grew revenue 7% operationally, while international grew revenue 14% operationally. In terms of species, our companion animal portfolio generated 19% operational revenue growth in the quarter, with great performance in markets around the world. Our latest innovation in parasiticides, the triple combination Semperica Trio, is increasing its global adoption. Our groundbreaking dermatology products, Apropos and Cytopoint, continue to redefine and expand the category. And we completed the first full quarter of sales for both of our new monoclonal antibody therapies for osteoarthritis pain in dogs and cats, Librella and Silencia. These new products are exceeding expectations and receiving very positive feedback from veterinarians and pet owners in European markets where they've been launched. When you add all of this to our growth in diagnostics for companion animals, I see our business continuing to capitalize on the positive demographics for pets. Increased spending on pet wellness and treatment will be sustainable well beyond the pandemic, and our portfolio and pipeline have us well positioned to continue leading and innovating in this market. Livestock product sales continue to present a more complex picture for the industry and Zoetis, with market dynamics varying widely by species and geographies. As we expected, our livestock portfolio declined 2% operationally in the third quarter, largely due to generic competition across cattle, poultry, and swine, and most significantly in the U.S. We have taken proactive strategies to protect these product lines, including the introduction of a lifecycle innovation like Drax and KP, but pricing pressure remains due to the increasing effects of generic competition. On the positive side, we saw 7% operational growth for livestock and international, as markets like Brazil, Chile, and other emerging markets performed well. Our long-term advantage in livestock continues to be our diverse portfolio and strength across geographies and product categories like medicines, vaccines, and medicated feed additives. We also continue to invest in R&D programs that align with our customers' long-term needs for more efficient and sustainable production methods, which can be built on new therapies, analytics, and digital solutions. We remain on track for a record-setting year with updated guidance for operational revenue growth in the range of 14% to 14.5% and adjusted income growth in the range of 16.5% to 18% for 2021. Our major catalysts for growth have performed well this year and have more runway ahead for 2022 and beyond. And will we make the right investments and continue successfully executing our growth strategies? Our strength in pet care has an incredibly strong foundation across parasiticides, dermatology, and vaccines. Through the first nine months of 2021, our companion animal portfolio has grown 29% operationally. We also remain very excited about the long-term blockbuster potential of our new monoclonal antibody franchises in pain, Labrella and Silencia, as they grow in Europe and we make progress on approvals in the U.S. We currently expect approval of Silencia in the US in the first half of 2022, with Lorella remaining more likely in the second half. Our revenue growth in international markets has been 20% operationally through the first nine months, driven by China, Brazil, and other emerging markets. We continue to expect growth to come across both our companion animal and livestock portfolios in these markets. Finally, our diagnostics portfolio remains a key catalyst for growth, with 28% operational growth through the first nine months. We are gaining significant traction with our expansion of the point-of-care portfolio in markets outside the U.S. We always believed international expansion was one of the biggest value drivers for the Abaxis acquisition once we combined that portfolio with the global Zoetis footprint. The acceleration of international growth for diagnostics is a very positive sign and continues gaining momentum. We also recently added digital psychology testing to our VetScan images platform in the U.S., U.K., Canada, Australia, and New Zealand. This means we can now offer a network of expert remote pathologists in addition to artificial intelligence technology for fecal testing. We are seeing our strongest early adoption of VetScan images in Germany, Australia, Spain, and the U.K., and we will continue developing additional applications for the platform over time. In addition to our ongoing investments in R&D programs and direct-to-consumer campaigns, we are investing in manufacturing capacity to meet increasing demands for our new parasiticide products and monoclonal antibody therapies. Expansions are underway at our sites in Kalamazoo, Michigan, Lincoln, Nebraska, and Telemore, Ireland. All of these are significant multi-year projects to ensure we have ongoing reliable supply while maintaining a diverse global network of third-party contract manufacturers that give us the greatest flexibility and redundancy. Our supply chain team has done an excellent job over the last two years to optimize inventory levels of key products while minimizing the impact of a challenging global supply landscape. We continue to carefully monitor and manage our supply chain and inventories. And finally, before I hand things off to Wetni, I wanted to note our recent news about changes in our R&D leadership team. Longtime R&D leader, Kathy Knupp, will be retiring at the end of the year and ensuring a smooth transition through February. I am very grateful to Kathy for building the most innovative and productive R&D organization in the animal health industry and for leading us with a rich pipeline of future innovations and R&D talent, which includes her successor, Rob Holzer. Rob has been with Zoetis since 2015, working on many of the innovations that have come to market recently in parasiticides and monoclonal antibodies. He has experience running our global therapeutics and biologics R&D organization and is the right leader for the future of innovation at Zoetis. In closing, I want to thank our colleagues for delivering another great quarter and bringing the value of Zoetis to our customers every day. we are confident in the updated guidance we have provided and see the fundamental growth drivers of our business continuing into 2022 and beyond. Now, let me hand things over to Whitney.
spk13: Thank you, Kristen, and good morning, everyone. The focus of my comments today will be on our third quarter financial results, the contributing factors that drove our performance, and an update of our improved full-year 2021 guidance. In our third quarter, we generated revenue of $2 billion, growing 11% on a reported basis, and 10% operation only. Adjusted net income of $597 million was an increase of 14% on a reported basis and 10% operation only. Operational revenue grew 10%, with 2% from price and 8% from volume. Volume growth is comprised of 5% from new products, including Sempericatrio, and 3% from our inline portfolio, primarily our key dermatology franchise. Now let's dive further into the details of the quarter. Companion animal products again led the way in terms of species growth, growing 19% operationally, with livestock declining 2% operationally in the quarter. Our parasiticides portfolio made the largest contribution to companion animal growth, driven by cells of Semperica Trio and continued strength across our broader portfolio, including the Pearl Heart franchise, Semperica, and Revolution Stronghold Plus. We also saw robust growth in our key dermatology products, ApriCoil and Cytopoint. Saberica Trio had another exceptional quarter, hosting revenue of $122 million, representing operational growth of 140% versus the comparable 2020 period, with year-to-date sales of $350 million, We believe the global fleet, tech, and hardware market will continue to expand and that our broad and innovative portfolio, which was 32% operationally in the quarter, has us well positioned to capture share and outpace our competitors. Global sales of our key dermatology products worth $321 million in the quarter, growing 26% operationally. Global sales exceeded $300 million for the first time in company history, and we remain ahead of schedule to surpass $1 billion in dermatology sales for the year. Our diagnostics portfolio had operational sales growth of 7% in Q3 against a very challenging comparative period as the third quarter of 2020 had a sharp increase in wellness visits following wide-scale clinic closures in the second quarter. Our international diagnostics portfolio performed very well, which, as Kristen mentioned, was a key component for the strategic rationale of the AVAXIS acquisition. Diagnostics remains the key growth driver for Zoetis, and we will continue to make significant investments in new technology, expand our reference lab footprint, as well as provide flexible solutions to our customers. Our equine products delivered strong results, with operational sales growth of 20% in the quarter, as horse shows and racing returned to pre-pandemic levels, and fueled growth in vaccines, as well as nutritional and pain products. The expected decline in livestock in the quarter was primarily driven by our U.S. cattle and U.S. poultry businesses, as our international segment delivered operational growth across all species. Globally, our cattle business declined 5% operationally in the quarter, driven by the impact of generic competition for Jackson and a difficult comparative quarter resulting from COVID-19 dynamics and an earlier fall cattle run in the U.S. in the third quarter of 2020. Poultry also declined in the quarter as producers in the U.S. rotated to lower-cost alternatives to our premium products as a result of current market dynamics. Cells were also negatively impacted by generic competition of zoomics and BMD, our alternatives to antibiotics and medicated feed additives. The decline in cattle and poultry offset the growth in fish. swine was essentially flat in the quarter as decline in the U.S., primarily from pricing pressure on our anti-infective and vaccine portfolio as a result of generic competition, offset the growth internationally from further key account expansion. Overall, we delivered another strong quarter, benchmarked against a very difficult prior comparative period on both the companion animal and livestock sides of our business. Now let's discuss the revenue growth by segment for the quarter. U.S. quarterly revenue exceeded $1 billion for the second consecutive quarter, with revenue growth of 7%. Sales of companion animal products grew 17%, and livestock products sales declined by 13%. For companion animal, pet care trends continue to be robust. Vet clinic revenue and patient visits grew again this quarter, against growth rates from the third quarter of last year, which were well above historical levels. Our view remains unchanged that certain trends will moderate, but will remain above pre-pandemic levels. Growth in U.S. companion animal was led by our parasiticides portfolio and our key dermatology products. Siparacus trio continues to perform well, with U.S. sales of $110 million and year-to-date sales north of $300 million. This quarter is also an excellent representation of our commitment to invest in the broader prior suicide portfolio as we launched a targeted DTC campaign for poor heart and prevalent heartworm geographies. Key dermatology sales were $217 million in the U.S. for the quarter, growing 20%, with significant growth for Apoquil and Cytopoint. U.S. diagnostic sales grew 2% in the quarter, which, as I mentioned earlier, had a very difficult comparative period. However, year-to-date performance has been strong at 23% growth. U.S. livestock sales declined 13% in the quarter. Our U.S. cattle business faced a comparative period that saw robust growth as third quarter performance of 2020 benefited from the early fall cattle run, and pent-up demand worked its way through the system. In addition, generic competition had not entered the market in the third quarter of 2020. Our generic defense strategy has been successful, as we have been able to maintain a greater volume share of the terlithium isin market than originally expected, although additional generics will likely enter the market in the coming quarters. From an end market perspective, producer profitability remains challenged by input costs, primarily feed and labor. U.S. poultry sales declined in the quarter as smaller flocks resulted in lower disease pressure, allowing producers to expand usage of lower cost alternatives to our highly efficacious premium products. In addition, generic competition is creating pricing pressure on our ZOAMIX and BNT franchises. To summarize, our U.S. operations delivered another strong quarter driven by our innovative and robust companion animal products, along with pet care in markets displaying very strong fundamentals. The near-term weakness in our U.S. livestock business has been expected and has been more than offset by the strength in companion animal, which demonstrates the importance of diversification across species. Now turning to our international segment. Revenue of our international segment grew 14% operationally in the quarter, with companion animal revenue growing 24% and livestock revenue growing 7% operationally. In the second half of 2020, we saw material uptake in medicalization rates and standard of care by pet owners, a trend which has continued through the third quarter of this year. We, in turn, made significant investments in advertising and promotion to capitalize on favorable market conditions and drive growth. Copan Animal achieved broad-based growth internationally in the quarter, led by strong performance of our T-dermatology products. Through three quarters of 2021, year-to-date sales are in excess of total sales from the entire prior year. In addition, we are in the early stages of a DTC campaign for key dermatology, which we expect will create additional demand for our products. Parasiticides had a strong order internationally, led by significant growth in the Semperica franchise, which benefited from DTC campaigns and drove growth in Brazil, Eastern Europe, and Latin America. Librella, a monoclonal antibody for alleviation of ovarian pain in dogs, has done extremely well, generating $15 million in quarterly sales in a select number of markets. Feedback from veterinarians and pet owners on the quality of life improvement for the patients has been extremely encouraging. Our feline monoclonal antibody for alleviation of ovarian pain, Selencia, had positive feedback from the early experience programs in Q2 and launched in the EU this quarter. Oil pain in cats is a significant unmet need in animal health, and our view is that Celentia will become a blockbuster product, with the pain market for cats becoming approximately a $200 million global category over time. Our international diagnostics portfolio grew 20% operationally in the quarter, with significant growth in consumable and instrument revenue, and strong growth across a number of geographies, such as the UK, Australia, China, and various other markets. Moving on to livestock, our international business again delivered growth across all species, led by strong operational growth in cattle and fish. Cattle growth in the quarter was driven by further key account penetration and favorable export market conditions in Brazil and several other emerging markets. Our fish portfolio continues to perform very well, growing 21% operationally. Growth in our fish portfolio was primarily the result of increased sales of our alpha flux sea lice treatment product, as well as strong growth in vaccines. Performance in swine and poultry were also fueled by growth in key accounts, as well as overall market growth, primarily in emerging markets. At a market level view for our international segment, all major markets grew operationally in the third quarter, with the exception of France, which was essentially flat in Q3. Emerging markets was again a key contributor to our international performance, led by Brazil, which grew 22% on an operational basis. As we expected, growth in China slowed in the third quarter, as lower pork prices challenged producer profitability. However, the companion animal business in China, which grew double digits once again, offset the weakness in swine. Overall, total emerging markets has grown significantly in both the quarter and on a year-to-date basis. Our international segment again delivered strong results with robust growth in comparing animal and growth across all species and livestock. On a year-to-date basis, our international segment has grown 20% operationally, with our comparing animal and livestock businesses each growing double digits. While falling pork prices in China are creating a headwind that is moderating growth in swine, it is more than offset by the growth across other species and markets, further demonstrating the importance of our diversity across species and geography. Now moving on to the rest of the P&L. Adjusted gross margin of 70.7% increased 110 basis points on a reported basis compared to the prior year as favorable product mix for an exchange, low inventory charges and price were partially offset by higher manufacturing costs, freight and distribution costs. Adjusted operating expenses increased 19% operationally, with SG&A expenses growing 20% operationally, resulting from increased compensation related costs, as well as increased advertising and promotion expense, freight, and T&E. R&D expenses grew 17% operationally, driven by higher project spend. The adjusted effective tax rate for the quarter was 16.7%, a decrease of 330 basis points due to favorable changes to the jurisdictional mix of earnings, including increased favorability related to foreign-derived intangible income and an increase in favorable discrete items compared to the prior year's comparable quarter. Adjusted net income and adjusted diluted EPS grew 10% operationally for the quarter, primarily driven by revenue growth, gross margin expansion, and a lower effective tax rate. Our liquidity position remains very healthy, and in the third quarter, with $3.3 billion in cash and cash equivalents, following a $600 million repayment of long-term debt in August. Our financial flexibility is in a very strong position, which allows us to make meaningful investments in our business while returning excess cash to shareholders, as demonstrated by our repurchase of Zoetis shares of approximately $200 million in the quarter. Now moving on to our updated guidance for 2021, which we are raising and narrowing as a result of our performance in the third quarter and confidence in our ability to deliver sustainable future growth. Please note that our guidance reflects point exchange rates as of mid-October. For revenue, we are raising and narrowing our guidance range. We projected revenue now between $7.7 and $7.75 billion, and operational revenue growth between 14% and 14.5% for the full year versus the 12.5% to 13.5% in our August guidance. Adjusted SG&A expense for the year are expected to be between $1.91 and $1.94 billion versus $1.87 and $1.91 billion in our prior guidance. The guidance rate largely represents additional competition-related costs as well as increased advertising and promotion spend to support growth of new products and key franchises. Adjusted net income is not expected to be in the range of $2.2 and $2.225 billion, representing operational growth of 16.5% to 18%, compared to our prior guidance of 13% to 15%. Adjusted diluted EPS is not expected to be in the range of $4.62 to $4.67, and reported diluted EPS to be in the range of $4.43 to $4.29. Now to summarize before we move to Q&A. In the three quarters, we've delivered strong operational top and bottom line growth, with revenue growing 17% operationally, and again raised and narrowed our full year 2021 guidance. We have achieved significant growth across our key franchises and are extremely excited about our new product launches and product pipeline. Now I'll hand things over to our operator to open the line for your questions.
spk14: Operator? And at this time, if you'd like to ask a question, please press star 1 on your touch-tone phone. If at any point your question has been answered, you can remove yourself from the queue by pressing the pound key. Again, in the interest of time, we ask that you limit yourself to one question and re-queue again with any follow-ups. Your line will be muted when you complete your question. Today's first question comes from Michael Riskin with Bank of America. Please go ahead. Your line is open.
spk04: Great. Thanks for taking the question, guys, and congrats on a strong quarter and raise the guide. I want to start on Draxen real quick. You touched on generic impact in U.S. livestock a number of times in your remarks. We assume that's predominantly from Draxen. Can you give us an update if you're seeing any stabilization there, or are you expecting further headwinds in 4Q or 2022, or do you think those trends improve and stabilize from here?
spk13: Yeah, thank you. We were very pleased to deliver another slump quarter and in position to raise a guidance once again for the year. With respect to Jackson, as expected, we continue to see the effects of the LOE, and Jackson was down about $15 million in the quarter. Now, our defense strategy here is working well. And we are largely maintaining our market share, although that does have the effect on price. So we're very pleased with how the product is performing, as well as Jackson KP in terms of, again, maintaining largely the market share from a bonding perspective here. As we look forward, we are expecting further growth. for their generic competitors to come into this space from a Jackson perspective. And, and that we believe will continue into the, into next year as well.
spk09: And the only thing I would add there is, you know, as we said, this is completely in line with our expectations, not just that we gave this year, but that we've been talking about when the generic enters. We generally said it takes somewhere between, you know, 20% to 40% over a number of years. We said at the beginning of this year that that would likely be a little faster, and we are on track to be doing that. We expect, you know, probably somewhere around a 20% hit on price for us on this product in the year. So in line with the expectations, Mike.
spk14: Thank you. We'll take our next question from Louise Chen with Cantor. Please go ahead.
spk07: Hi. Thanks for taking in my question here. So as we start to think about 2022, what are some of the pushes and pulls here? For example, will recovery from food services and restaurants be a tailwind in 2022 for livestock? And what else should we be thinking about? Thank you.
spk09: Thanks, Louise. You know, we are really excited for a number of the growth drivers that we saw this year, which, you know, we really think will continue into next year. I think our strength in parasiticides, our strength in DERM, I mean, you know, that will be a billion dollars this year, growing at 26% in the quarter. You know, diagnostics, again, year-to-date 28%, we think, you know, continues into next year. Really strong performance in our emerging markets, China, Brazil, and other emerging, which I think will continue into next year, not to mention our pain monoclonal antibodies. So I think we have a lot of the growth drivers this year that we think will continue into next year. I mean, obviously things we're going to watch for next year, you know, that could be headwinds for us. You know, could be, you know, the timing of competition for a potential product against Apoquel or Sempericatrio. As Whitney mentioned in his remarks, we're not really expecting that until the second half of 2022. Again, we don't have great visibility into that. You know, obviously, you know, we think livestock, you know, once we last some of this, you you know, that will lessen as a, you know, a real headwind for us. But overall, you know, we really think the durable growth drivers you saw this year really continue into next year, and we're pretty confident about that.
spk14: And we'll take our next question from Nathan Rich with Goldman Sachs. Please go ahead.
spk05: Thanks so much. If I could maybe follow up on the revenue outlook, Wetney, for 4Q. I think historically, you know, 4Q has been a bit of a stronger quarter. You mentioned the competition on Drax. And is there any other dynamic that we should have in mind in terms of the revenue cadence for the fourth quarter? And, you know, I guess with the focus on inflation and cost pressures in the market, do you feel like you've seen any pre-buying of products or stocking up from customers in either the livestock or companion business? Thank you.
spk13: Yeah, sure. Look, we continue to see really strong underlying market dynamics overall, and our portfolio is really well positioned and continues to perform very well against those dynamics. As we discussed on the prior earnings call, what we're seeing in terms of growth rates in the second half of this year is more a reflection of how the phasing occurred last year versus this year, given our position in the market. Again, the strong market dynamics that we continue to face. But the phase here, if you look at last year, the second half had almost 17% more revenue in the back half than the first half of last year. And so that's really what's driving the comp here. This is the phasing of last year, where this year is a little bit more normalized. As Kristen just referenced, we see a number of growth drivers for us, not only from the overall market, but also our portfolio across Paris, Durham, as we look at pain diagnostics as well. And with the one area, the areas that we're watching including Jackson. To your point around inflation, as you know, given our portfolio and the innovative products that we have and demand we see for those products, they position us well to take price. And you saw a 2% price in the quarter, including 10% operational growth. And we'll continue to look at opportunities to continue to do that as we go into next year. You saw in the quarter, our gross margins actually expanded by 110 basis points versus last year, Q3, and that despite some headwinds in the areas of freight, et cetera. So we'll continue to monitor those and take price where we can, given the innovative products that we bring to the market with our customers.
spk14: And our next question is from John Block with Stifel. Please go ahead.
spk02: Great. Thanks, guys. Good morning. See if I can slip in a couple. The first on livestock, and quite honestly, was pleasantly surprised by the international livestock up 7% operationally. There's just a lot of noise out there with other companies and swine chatter. So I guess the first question is, was that a clean number? You know, no pull forwards and maybe just talk to this market overall. Do you still view it as a low single-digit grower market? for you this year with eventual improvement to mid-single-digit and call it 22-23? And then just to pivot, Christian, remind me, I know we're not going to get a 22 guide, but maybe conceptually at a high level, how do we think of 22 in terms of a year where the delta, how do we think about the delta between revenue and EPS growth? And I guess where I'm going with this is a lot of innovation for you where you're still dominating the market. So conceptually, do we just think about it as another year of spending, supporting the portfolio, DTC, where the delta between those two revenues, REVs and EPS, might be a little bit tighter than prior years? And sorry for the long-winded questions. Thanks.
spk09: Sure. I'll take the first part of the question, then I will let Whitney take the second half, John. You know, livestock is a complex picture, so I think your insight is quite well-founded in the sense of not just the difference between U.S. and international but the difference between the species. So, as you rightly mentioned, the U.S. was down significantly in livestock, and that's pretty much generic competition against Draxen, Zolomix, and some other products that we've mentioned before. But to your point, international was up seven. And that was still with a really rough time in China, as you saw in the quarter, with China livestock down about 10 percent, but more than made up for by China's companion animal. And really it has to do with the mix between, you know, species that are growing, you know, quite quickly for us, like fish, you know, cattle and poultry may be struggling, but you look at strong growth in emerging markets, which is what's really booing livestock. And as we've said in previous quarters, you know, how U.S. livestock goes does not mean how overall livestock goes. So I think we, you know, really the diversity of our portfolio across species, across geographies continues to really be one of the strengths for us, at least, And we do think overall you'll see a flat to low single-digit growth overall across the company for us in livestock. That may be a little bit slower than the market, as we said, because of Draxen and some of the key LOEs that we have. And ultimately, once we lap some of those LOEs, we think you do go back, you know, in 23, 24 to a mid-single digit, exactly where we've always been. So, you know, the historic growth of livestock is around 4%. And as we said, we think it absolutely returns there. And, you know, what's the reason to believe? Well, if we're growing international in the quarter at 7%, and really the U.S. is mostly getting hit by the generics, once we lap those, we do believe you can get back to a livestock growth in the sort of mid-single digits the way it historically has been. But I'll let Whitney take your second question.
spk13: Yes, as we discussed just before here, we're well positioned going out of this year into next year to continue to sustain growth beyond this year. In terms of how you might see things flow through the P&L, our long-term value proposition is to grow adjusted net income faster than revenue. We don't see any reason to depart from that. However, given the opposition across a number of really key brands and the demand that we see, we'll take the opportunity to invest behind those brands to drive DTC and other awareness campaigns, et cetera. We also are investing in R&D as well as diagnostics and other areas that we believe will help us accelerate and enhance growth going forward. So that may at times cause that difference to be a little bit tighter, as you said, from time to time, but it's to drive that growth, that enhanced level of growth that we see given the opportunities that we see in the markets.
spk14: Thank you. We'll take our next question from Aaron Wright with Morgan Stanley. Please go ahead.
spk00: Great. Thanks. Can you provide us any metrics on the contributions from Librella and Valencia in the quarter or any metrics around reorder rates of the products in certain markets and how the launch is progressing relative to your expectations at this point in the expected timeline, again, for the U.S. launch? And then second, just more broadly on companion animal trends, any monthly metrics you can give us over the course of the quarter and kind of what's expected for the fourth quarter and beyond in terms of in terms of kind of the underlying demand trends across that market. Thanks.
spk13: We continue to be very pleased with the performance of Librella and Silencia in the European markets where we launched the product. The feedback has been very, very strong from vet and pet owners as well. We saw $15 million of revenue from Librella in the quarter and about $2 million from Silencia. Again, really the first full quarter of those products being in those select markets for us. In terms of where we're expecting approval for next year, we continue to expect approval for Librella. as Kristen mentioned, in the first half of the year in the U.S. I'm sorry. So let's say in the first half. Sorry about that. So let's say in the first half with umbrella more likely in the second half of the year in the U.S.
spk09: And I'll take the second half of your question, Aaron, with regards to U.S. companion animal trends. We don't have the monthly data, but just putting some of this in context, you know, we believe that, you know, if we look at the data overall right now, we're seeing, you know, overall vet clinic revenue growing 7%, which, as you know, is higher than the historical rate. It's been a little bumpy over the year. I mean, the weather and lots of different dynamics have been driving it. You know, you saw 8% in Q1, 14% in Q2. You know, we're seeing 7%. You know, the way we sort of see this is we think it overall will be higher than historical norms. I mean, is it the double digit that you saw consistently in 2020? No, but I don't think, you know, we saw it very weak as you saw Q1, and there's a huge bounce back in the second half. as we saw last year. We do think that vet revenue at vet clinics will continue to grow above historical rates. You know, we're not really sure, as I said last quarter, that we think that's going to be double digit. But, you know, historically, group five to six, you know, is it going to be seven to eight? I think our view is it will still be stronger than normal, but maybe not in the double digits overall. But, I mean, still seeing strength. If you, any one of you who've been trying to get an appointment for your dog or your cat at the vet, it's pretty challenging to get one. So, mostly because the demand really does remain high there.
spk14: Our next question comes from Chris Schott with KP Morgan. Please go ahead. Great. Thanks so much for the questions.
spk04: My question is on the Derm portfolio. You've built a billion-dollar franchise here. But as we think about competition coming in 2022 or beyond, What are you anticipating in terms of the impact that a competitor launch could have? I think historically, you've talked about a second entry, more building the market than maybe directly cannibalizing your existing business. But I guess as you've had a longer window of time to develop this, do you reach a point where that competitive launch, I guess, more impacts your growth versus, I guess the heart of the question is, how much more room is there for market expansion as a new player comes in? Thanks so much.
spk09: Sure. Thanks, Chris. Yeah, I mean, our germ portfolio has continued to grow. And I think what we've really discovered is there's still a large number of untreated animals out there. So if you look at – we still believe there are 7 million dogs that are diagnosed, you know, with some form of itchiness that are still not being treated. So we do believe there's significant market growth. There's still geographic expansion. We've really invested heavily in direct-to-consumer advertising to grow this market. People are home more with their pets. They're spending more time. So I think people are really starting to notice this edge is bothering them more maybe than it did historically. So they are seeking help. We've also really invested in programs such as in the U.S., our Pet Care Rewards Program, which is making customers loyal to our products. So we have been expecting competition, to be frank. We probably thought it would have happened before now. But we think there's lots of rooms to continue to grow this market. And so, you know, will it remain at 26% if you sell in the quarter? Our growth might go down a little bit, but I still think this will be a growing market for us, just given the large number of untreated dogs in the U.S. and around the globe.
spk14: And our next question comes from Balaji Prasad with Barclays. Please go ahead.
spk10: Hi, good morning, and thanks for the questions. Maybe firstly on China, with the approval of Cytopoint, and as Christine, you've often spoken about China as a major market, understandably. Can you help us understand the expectations around the market and any comparative range of prices that you think this market would support? And also, how far behind would APICO be in terms of getting interviews launched in China? Thank you.
spk13: Yeah, I'll start and see what Kristen wants to add here with respect to China. As expected, we saw growth this L8 in China this quarter with about 1% growth in the quarter. But keep in mind, China has actually grown 35% on a year-to-day basis. And we're up against a very solid comparative last year where we saw 63% growth in the quarter. And swine was actually up 159% in the same quarter last year. Again, the pricing dynamics for pork, which we discussed on the last call, started about mid-June. And so we expected to see a sort of decline in the pork area. Now, the other part of your question is long-term, what are we expecting in the market? We do see continued opportunity to grow substantially in China over time. as we bring more and more of our products to the market. But also, if you look at what's happened since African swine fever, you see a concentration more in larger producers versus backyard farms, and we think that will build well in terms of home medicalization over time as well and for our premium products with respect to swine. And then on the companion animal side, we continue to see really robust growth in China in companion animal. We saw double-digit growth this quarter in companion animal, which obviously was partly offset by swine. So long term, we continue to expect really solid growth in China, which is our second largest market, driven by the market dynamics that we discussed, although there may be cycles that we'll see in swine as we're going through right now from a pricing standpoint.
spk09: Yeah, the only thing that I could add to that is, you know, we obviously have launched Apical there. You know, it is doing well. You know, it is, you know, growing. You know, this is a specialty product in a market that's traditionally been mostly a primary care generalist market. So we are really excited to grow that. And I think we have a very strong pipeline of products coming into China, new innovations coming. that we're going to be bringing in just like we brought in apple quality approval right now site a point which has not yet launched there um and honestly lots of products behind that that we're really excited uh to be launching in china so we you know it is our second largest market we do think it's going to continue to have very strong growth um as you know what he said with our year-to-date at 35 you know we're really bullish on our ability to continue to grow in china
spk14: Next question comes from Steve Scala with Cowan.
spk12: Please go ahead. Thank you. I have a question on Librella and Silencia in Europe. There are several parts of the question. Are owners returning monthly for the next injection or is the time between injections longer than that? What is the average patient cost of each injection and And just to clarify, I think you said Celentia in CATS is a $200 million opportunity. Why is that only $200 million? Why isn't it multiples of that? Thank you.
spk09: Sure. I can start there. We are really pre-Librella. Yes, we are seeing animals return. I don't have the specific number of days that they're coming back. We can certainly look into that and see if we can get that data for you. It is priced at a premium to both Remedil as well as to Galloprant on the market. Given it has a phenomenal both safety and efficacy profile, it has been priced at a premium. The price obviously varies from market to market. I don't think we have that overall information. With regard to the second part of your answer on Silencia, cats is a quite different market. So although today the market in dogs is 400 and we believe we can double it, the market's actually pretty higher to size in cats. There's very few approved products out there today. to treat cats. So it's hard to even say what it is. I mean, it's not zero, but it may be tens of millions. It's certainly not hundreds of millions of dollars. And cats are less medicalized than dogs. So you really have to first medicalize those cats. Cats like to hide their pain. So you also have to find a way that pet owners can notice pain in cats better and identify it and bring them to the vet. So the reason we said it's a smaller market is the number of cats that are medicalized are just smaller. and then the number that are actually treated is really small. So the first thing is you need to be able to identify in cats with pet owners, convince them to take their cats to the vet, and build a market from scratch. I mean, cat owners, when they used to call the vet when their cat was suffering from pain from osteoarthritis, were told there really wasn't anything. There's no product in the U.S., for example, whatsoever. So it's really about really retraining pet owners that there is a product that can meet their cat's needs and helping vets really bring the cats into the vet. I mean, a lot of pet owners don't like putting their cats, you know, increased to bring them to the vet, as you probably know. But we're very confident that we have a strong pipeline for cats that will increasingly medicalize cats over time and help build this market. But as we said, you know, just given the number of medicalized cats, it will be a smaller market than the dog space, and it will likely take a little longer to build it.
spk14: And our next question comes from Christine Raines with William Blair, please go ahead.
spk08: Hi, congrats on the great quarter and good morning. My question is that we noticed that TRIO declined sequentially for the first time. So I was just hoping to have some color on this and kind of how it's performing versus your expectations. Thanks.
spk13: Sure. Look, we saw another strong quarter across our parasiticides franchise. Small animal parasiticides grew about 32% in the quarter with $391 million. We had TRIO sales of $122 million, $350 million so far through this year on a year-to-date basis. The product continues to do extremely well, particularly in our large corporate accounts where the penetration rates are about 90%, and we're seeing about 80% reorder rates as well. So we continue to gain share in this very large market. If you recall, last year we launched the product, and so we're now lapping it. And in terms of for our synthesized sort of seasonality, starts to play into it in terms of what you might see as well. So this is really in line with our expectations, and we couldn't be more pleased with how the product is doing in the market. And now that we've really penetrated well with the large corporate accounts, we're now going into some of the midsize accounts as well. So we continue to see the product gain momentum, and we've been, again, in line with our expectations.
spk14: The next question comes from Navon Tai with Citi. Please go ahead.
spk11: Hi, good morning. Can you share your stats for pet ownership going forward and average revenue per companion animal visit? And apologies if I missed them. And can I quickly ask, are you able to comment on the EU Commission investigation to the Belgian office? I understand it was related to antitrust allegations. Thank you.
spk09: Sure. I'll start with your question with regards to the investigation, and then Wetne can take the second half of your question on companion animal. Yes, the EC inspection pertains to Zoetis' decision to discontinue the clinical development of a single experimental drug candidate. We're working with the EC to ensure it has all the necessary information that it needs. And we are confident that we can align the concerns which prompted the investigation. So I think your second part of the question was on companion animal trends, you know, of the 7%, you know, which was broken up between 3% on traffic and 4% on spend-for-visit. But I don't know if you've got any comments on that.
spk13: Yeah, sure. As Kristen mentioned, we saw 7% revenue growth for vets with visits up 3% and revenue-for-visit up about 4%. And that's up against a prior year where we saw a real increase in the third quarter in terms of vet visits, et cetera, given the effects of the pandemic. We continue to expect that these statistics will continue to be above pre-pandemic levels, albeit they will moderate from their peak. Two other important points to recall here is that if you look at pet ownership, more and more we're seeing – Millennials and Gen Z bring pets into their homes, and they're doing a lot more research and looking at pet care and wellness, and they're willing to spend more on their pets. So with the increase in pet ownership, we expect that to continue to provide really strong tailwind in the industry for spending on pets as we look forward and as those pets continue to age as well.
spk14: And our next question comes from David Steinberg with Jefferies. Please go ahead.
spk03: Thanks, and good morning. I had a question on potential competition for us, Perica Trio. I know it's been a bit of a moving target. I think initially you thought it could even happen this year, and I think it's been pushed out to the right three times, perhaps to the second half of 2022. I'm just curious. I know competitors type lift about what they're doing. But any thoughts from your end on why there continues to be a delay here? Do you think it's regulatory or could it be technical? And if it's technical, is it something that could delay competition for many years to come? And then just hypothetically, if competition comes into your germ segment around the same time as competition comes for Sympirica Trio, Do you think you have the flexibility to show above segment growth during this period? Thanks.
spk09: Sure. You know, I wish we knew exactly. I mean, you know, we have the same theories that you do, that there could be certain technical reasons for some competitors. And let me be clear, everyone's working in this space. Parasiticide is the largest single market in animal health at $5 billion. I think if you're pretty much any of the large companies we compete with, they're all trying to come up with their own triple combination. So I don't know that it's the same thing that's holding each of the companies back. I mean, we're not really clear. It definitely could be regulatory. It could be technical. It could be manufacturing, CMC. We're not exactly clear. And to your point, there's really very few public companies who actually disclose much about their pipelines. Their ability to know where people are is quite limited you know we just and we always i i know it's a little stuffy we keep pushing it out you know sort of like six to 12 months from whenever you ask the question because if we haven't seen it and we haven't heard it in corporate accounts as they're negotiating with us we think it's definitely you know another three every quarter it's another three plus months out and that's really where some of our thought comes from And, yes, we are confident that even if you'll see, look, we are planning on competition in these key products. But I think it's the strength and diversity of our pipeline globally that makes us confident we can continue to grow above market. I mean, we've got diagnostics. We've got pain maps. We still think they're going to be growing in Durham, to be honest with you. It's still a lot of unmet medical needs. So, yes, we remain confident that we can grow above the market, even as we do start to face competition in some of these key franchises.
spk14: We'll take a follow-up from Balaji Prasad with Barclays. Please go ahead.
spk10: Hi. Thank you for the follow-up. Just a question on Draxel. I mean, we went into it in detail, but I know that you got approval for Draxel KP in July, probably launched sometime in 3Q. So what are the expectations from the KP? Is it more to ensure that the market stays flat, or is there scope for this to revive growth? And secondly, on the same – I see that till now, Bimera and Elanco have launched generic versions. You'll call out a couple more generics. How many more are you expecting next year? Thank you.
spk09: Sure. Jackson KP was part of our defense strategy. I don't think it's going to restart a growth for us necessarily in a market as we're seeing generic competition, but it is, as Whitney outlined in his remarks in the beginning of this call, has helped us retain our share. It provides incremental innovation, incremental benefit to our customers, and a reason why obviously, to stay with us. Yes, we have had in the U.S. two competitors so far. We've heard up to three more are potentially coming. You know, I don't know why they haven't. We would have expected them this year. So, you know, their approval, whether or not they actually enter the market, we're not really, we're not sure when and if on that, but we would assume we probably have a few more entering.
spk14: It appears we have no further questions. I'll return the floor to Kristen Peck for closing remarks.
spk09: Great. Well, thank you, everyone, for your questions today and for your continued interest in Zoetis. Just to summarize, I think we delivered another strong quarter of results driven by our diverse global portfolio and strength in pet care parasiticides and dermatology products. We're raising our guidance to the full year 2021, and we remain on track for a record-setting year for us. And we're continuing to invest in the areas to support our long-term growth. And we remain confident in the fundamental growth drivers for animal health and for zoetis into 2022 and beyond. So thanks so much for joining us today. Have a great day.
spk14: This will conclude today's program. Thanks for your participation. You may now disconnect.
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