Zoetis Inc.

Please stand by. Your program is about to begin. If you need assistance on today's call, please press store zero. Welcome to the first quarter 2022 financial results conference call and webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the investor relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial-in or on the investor relations section of zoetis.com. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your 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 posting your question or 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.

Thank you, operator. Good morning, everyone, and welcome to the Zoetis first quarter 2022 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. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including but not limited to our annual report on Form 10-K, and our reports on Form 10Q. 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. 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 the company's 8K filing dated today, Thursday, May 5, 2022. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Kristen.

Thank you, Steve, and welcome everyone to our first quarter earnings call for 2022. Zoetis delivered a strong quarter to start the year with 9% operational revenue growth and 8% operational growth in adjusted net income, driven by the strength of our companion animal portfolio. We generated similar growth for both the U.S. and international segments with 9% and 8% operational growth, respectively. Our strength across parasiticides, dermatology products, monoclonal antibodies, and diagnostics are all capitalizing on the marriage of positive trends in pet care with customer-driven science coming from Zoetis. In the first quarter, we grew 20% operationally in our companion animal portfolio. As we expected, our livestock portfolio continued to face challenges, declining 6% operationally in the quarter, largely due to declines in swine product sales in China and generic competition from Jackson. As we look at the rest of the year, we are updating our guidance to reflect the negative impact of recent changes in foreign exchange rates, but this has no impact on our previous operational growth rates and assumptions for the year. Even as we face uncertainties related to the war in Ukraine, COVID-19 lockdowns, inflation and ongoing supply chain constraints, we remain confident in the underlying strength and performance of our business. Our diverse portfolio, global scale, talented colleagues and continuous innovations remain the foundation of our long-term success and durability. and we continue to invest in the resources, marketing programs, and manufacturing capacity we need to support our growth. In R&D, we're building new capabilities and pipelines across our companion animal and livestock portfolios to ensure our long-term performance. In the first quarter, we continue to receive approvals for new products and indications, develop lifecycle innovations for major brands, and expand our portfolios into new markets. On the livestock side of the business, we expanded our cattle vaccine portfolio with an approval in the U.S. of Protiviti, the first modified live vaccine to offer protection against Mycoplasma bovis. This vaccine provides cattle producers and veterinarians with broader overall protection against bovine respiratory disease. We also gained approval in Brazil for Draxin-KP, which is also a treatment for BRD and combines the antimicrobial properties of Draxin with the non-steroidal anti-inflammatory ketopropin to rapidly reduce fever in a single dose. Draxen KP is also approved in the U.S., Canada, and European Union, Australia, and Mexico, and it has been an important part of how we continue to distinguish the Draxen brand in the face of generic competition. In poultry, we received approval in Brazil for Polvac Proserta HPT-IBD, a recombinant vector vaccine that is also approved in the U.S. and Canada. On the companion animal side of the business, we received another approval for Silencia, the industry's first monoclonal antibody for osteoarthritis pain in cats, adding Australia to the US, European Union, UK, Canada, and Switzerland. And another MAP therapy, Cytopoint, received a claim extension in Canada, so it now covers both the treatment of atopic dermatitis and allergic dermatitis in dogs. Cytopoint and Apriquel continue to grow significantly and expand the dermatology market as disease awareness and treatment options become more known to pet owners. We have a strong leadership position based on our innovative science and do not believe competing products will come to market in 2022. We also continue building our multi-purpose diagnostics platform, VetScan Images, with a recent addition of blood smear testing. Introduced in September 2020, VetScan Images is a first-of-its-kind technology with a multitude of applications, including AI fecal analysis, digital cytology image transfer, and now AI blood smear, all helping veterinarians broaden their in-clinic diagnostic offerings to provide the best care possible for dogs and cats. For the last two years, I've been speaking to you about our catalysts for growth, and those continue to drive our performance. Our outlook for growth in international markets remains very positive, based on our diverse global footprint and continued expansion opportunities for key brands like Semperica Trio, Apoquel, Cytopoint, Librella, and Silencia. In terms of Ukraine, we have condemned the Russian invasion from the outset, and we are deeply saddened by the senseless violence being brought upon the people of Ukraine. Our company, colleagues, and the Zoetis Foundation have worked together to provide veterinary care, medicines, financial support, and evacuation assistance to those in need. With every decision, even the most difficult and complex ones, we're guided by our purpose to nurture the world and humankind by advancing care for animals. While we have suspended all investments and promotional activities in Russia, the continued care of pets and livestock remains an essential responsibility for Zoetis and our colleagues, and we remain focused on maintaining a critical supply of animal medicines and vaccines for veterinarians and producers there. We anticipate a negative impact of about 1% to our original full-year growth expectations due to Ukraine and Russia, but we are maintaining our previous operational growth rates based on the overall strength of our companion animal business and the positive momentum of expanding our U.S. pet care and diagnostic commercial teams. Speaking of diagnostics, another catalyst for growth, we delivered 12% operational growth in the first quarter, we continue to invest significantly in this space to accelerate our growth. For example, we've been shifting our go-to-market model this year and building a dedicated field force for our diagnostics portfolio. This hiring is a significant part of a 40% increase to our total U.S. companion animal field force. We see field force expansions as a key lever to supporting growth opportunities in our diagnostics and pet care businesses. We also continue to see very strong growth in pet care as we expand our major companion animal brands in markets around the world. Sempericatrio is doing very well as it continues to gain market share based on veterinarians' preference for an innovative triple combination parasiticide for dogs. Pet owners have also been demonstrating strong loyalty rates after trying Trio, and we are excited by the ability of our direct-to-consumer campaigns and additional Field Force colleagues to increase interest in this product. Librella is also doing incredibly well across Europe, and we remain confident in the blockbuster potential for Librella in 2022 and Silencia in the longer term. As we see improvements in supply, we will be launching Silencia in additional markets such as Canada and Australia this year. In terms of the US, we are still planning a launch of Silencia in the second half of the year, and we anticipate approval for Labrella by the end of the year, assuming FDA inspections are completed at facilities outside of the US. Overall, we continue to benefit from pet care trends in terms of increased demand, clinic revenues, pet ownership, and spending habits. Finally, a brief update on supply. As I mentioned last quarter, we are managing certain isolated supply constraints for Labrella, Silencia, and some of our other products as we compete for some limited manufacturing inputs critical to human health during the pandemic. We are also seeing additional global supply challenges related to Russia's invasion of Ukraine and the recent COVID-19 resurgence in China. While some of these challenges are global manufacturing and supply network to mitigate any impacts to our overall business. And our commercial teams are ensuring control launches for new products and coordinating with customers to minimize any impacts on their animal care. In conclusion, we are off to a good start for the year and we're maintaining our operational growth expectations for the full year. Our diverse and durable portfolio, global scale, and pipeline of innovations have us well positioned to meet customer needs and shareholder expectations for this year and beyond. Thank you. Now, let me hand things off to Watney.

Thank you, Kristen, and good morning, everyone. As Kristen mentioned, we had a very strong start to the year with continued growth across a number of our core product franchises. Today, I will focus my comments on our first quarter financial performance, the key drivers contributing to our performance, and provide an update on our full year 2022 guidance. In the first quarter, we generated revenue of $2 billion, growing 6% on a reported basis and 9% on an operational basis. Adjusted net income of $625 million grew 4% on a reported basis and 8% on an operational basis. Of the 9% operational revenue growth, 3% is from price, and 6% from volume. Volume growth of 6% consisted of 5% from new products, which includes Semperica Trio and Librella, 3% from key dermatology products, while other in-line products declined 2%. The decline in other in-line products was expected, and largely the result of a difficult comparison to the prior year and the impact of our swine business in China. Companion animal products led the way in terms of species growth, growing 20% operationally, with livestock declining 6% on an operational basis in the quarter. Our small animal parasiticide portfolio was the largest contributor to growth in the quarter, where our innovative and diverse flea, tick, and heartworm portfolio drove growth of 25% operationally. Semperica Trio posted global revenue of $164 million representing operational growth of 83% versus the comparable 2021 period. In Q1, Symperica Trio was the number one canine parasiticide sold in the U.S. in terms of revenue, and we recently launched Trio in Japan, a sizable international hardware market. Meanwhile, our key dermatology products, Apocryl and Cytopoint, had significant global growth again, with $307 million of revenue, representing 28% operational growth against a robust prior year in which key derm grew 24% in the first quarter. In Europe, our recently launched monoclonal antibody, the Brella, which is for osteoarthritis, pain in dogs, also meaningfully contributed to growth in the quarter, boasting $21 million in sales. Our global diagnostics portfolio recorded $98 million in revenue and had operational sales growth of 12% in Q1, growing across both our US and international segments. Growth was largely driven globally by consumable usage and new products. We also continue to see growth in the placement of new devices in international markets. Diagnostics remains a key growth driver for Zoetis, and we continue to make significant investments in our field force, new technologies, and reference lab extension. Our lifetime business declined 6% operationally in the quarter. A revenue decline in China's swine products was a result of both declining pork prices due to increased supply, and a difficult prior year comparable. In the U.S., generic competition for Jackson and unfavorable market conditions for producers, primarily resulting from elevated input costs, also led to a decline in cattle products. Our fish portfolio again grew double digits in the quarter, and along with the strength of our other emerging markets, partially offset the broader decline.

Overall, livestock performance in the quarter was in line with our expectations. Now moving on to revenue growth by segment for the quarter.

U.S. revenue again topped $1 billion in the quarter, growing 9%, with companion animal products growing 18% and livestock sales declining by 11%. U.S. pet care vet practice trends continue to be positive, with practice revenue growing approximately 5%, even in the face of challenging prior comparisons and the Omicron variant wave that impacted both visits and the availability of labor at clinics in January and February. Spending per visit increased 8% in the quarter, while visits declined 3%. Underlying demand for veterinary care remains robust throughout the country, even as people return to work. And we believe vet clinic revenue will continue to grow at levels above what we were seeing prior to COVID, as the standard of veterinary care continues to increase through innovation, better demographics, higher compliance, and more pets. Companion animal growth in the U.S. was driven largely by sales from our parasiticide portfolio, as well as key dermatology products. Growth of Semperica Trio was again strong in the quarter, with sales of $147 million in the U.S. growing 77%. We continue to meet our clinic penetration targets and take share within individual clinics with additional runway for future revenue growth.

Pet owner satisfaction with Trio is approximately 90%.

Key dermatology product sales were $194 million for the quarter, growing 23%, with Apriquel and Cytopoint each significantly contributing to growth. Our investments to support the portfolio have been instrumental in driving more patients into the clinic and will continue to invest meaningfully in this space, as a large portion of dogs with dermatitis remain undertreated, representing an opportunity to further expand the market. In an effort to support all of our long-term sustainable sources of growth in our companion animal portfolio, in April, we launched our new pet care go-to-market strategy, expanding our U.S. companion animal field force by approximately 40% and creating dedicated and separate diagnostic and pharma coverage for our portfolio of products. U.S. livestock declined 11% in the quarter, primarily resulting from our cattle business. This was expected as we experienced challenges from generic competition for Jackson, which didn't exist in the same quarter last year, as well as elevated input costs continuing to weigh on producer profitability. Meanwhile, a poultry business continues to be negatively impacted by the expended use of lower cost alternatives resulting from reduced disease pressure from smaller flock sizes, as well as generic competition for Zoemix. Swine product sales grew in the quarter as a result of favorable market conditions for producers, and higher disease prevalence. Moving on to our international segment, where revenue grew 3% on a reported basis and 8% operationally in the quarter. Companion animal revenue grew 23% operationally, and livestock revenue declined 3% operationally. Increased sales of companion animal products resulted from growth of our key dermatology products, monoclonal antibodies for alleviation of ovary pain, and our parasiticide portfolio. Several key brands continue to benefit from our international direct-to-consumer campaigns in Latin America and parts of Europe, and we remain excited with the long-term prospects of these programs. We are encouraged by the performance of our monoclonal antibody for Oripane, with Labella generating $21 million and Silencia delivering $3 million in first-quarter sales. Labella remains on track to exceed $100 million in revenue this year. As we mentioned last quarter, Librella became the number one paying product in the EU in the first year of launch, with the underlying performance metrics being very favorable for future growth. Reordering rates remained at around 90%. Compliance exceeded our initial expectations, and we continue to see significant opportunity to expand the paying market, with a meaningful percentage of dogs on Librella being new to the market. Meanwhile, international livestock declined 3% operationally in the quarter. This decline was driven predominantly by our swine portfolio in China. As we indicated over the past several months, increased pork supply in the market led to a significant decline in pork prices, which impacts producer profitability. In addition, our first quarter of 2021 presented a difficult comparative period as pricing and producer profitability in that quarter had been at an all-time high. While we expect China to return to growth in the back half of the year, We anticipate a challenging second quarter for our swine portfolio. Partially offsetting our decline in swine was growth in our fish, poultry, and cattle portfolios. Our fish portfolio grew double digits again this quarter, driven by growth of the alpha-flux sea lice treatment product and alpha-jex live vaccine for SRS in Chile. Sales of cattle products grew in key markets due to favorable market conditions and pricing in Brazil and Australia, as well as demand generation efforts in emerging markets such as Turkey and China. Now, moving on to the rest of the P&L for the quarter. Adjusted gross margin of 71.6 percent improved 60 basis points on a reported basis compared to the prior year, resulting from favorable product mix, price for an exchange, and lower inventory charges.

This was partially offset by higher manufacturing and freight.

Adjusted operating expenses increased 14% operationally, with SG&A growth of 16% operationally, driven by headcount related compensation costs, T&E, advertising and promotion, as well as direct to pet owner campaigns for key brands. R&D expenses increased 4% operationally due to higher compensation costs. The adjusted effective tax rate for the quarter was 18.9 percent, a decrease of 20 basis points driven by the impact of favorable discrete tax items and settlements with certain tax authorities, slightly offset by changes in the jurisdictional mix of earnings. And finally, adjusted net income grew 8 percent operationally, and adjusted diluted EPS grew 9 percent operationally for the quarter. Capital expenditures in the first quarter were $115 million. We are still anticipating a significant increase in capital expenditures for the full year 2022, primarily related to investments in Ireland, the US, and China to support manufacturing capacity needed to meet our long-term growth demands. In the quarter, we returned over half a billion dollars to shareholders through a combination of share repurchases and dividends. We purchased approximately $361 million of Zoetis shares, representing our largest dollar-based quarterly share repurchase ever.

Now moving on to guidance for the full year 2022.

Foreign exchange rates on our updated guidance are as of late April and reflect the recent strengthening of the US dollar. Please note that any update to our full year guidance are related directly and only to foreign exchange and that the ranges of our operational growth rates for revenue of 9% to 11% and adjusted income of 10% to 13% remain the same as our previous February guidance. We are holding these top and bottom line operational growth rates the same, despite the conflict in Russia and Ukraine negatively impacting our expected full year operational growth by 1%. We feel we can offset this impact with the strength of our companion animal portfolio. Beginning with revenue for the full year 2022, we are decreasing both the low and high end of the range by $100 million to reflect the impact of foreign exchange. We are now projecting revenue of between $8.225 and $8.375 billion while maintaining our expected operational growth of 9% to 11%.

For adjusted net income for the full year 2022, we are decreasing both adjusted net income is now expected to be in the range of $2.365 to $2.420 billion, while maintaining our expected operational growth of 10% to 13%.

And finally, we expect adjusted diluted EPS to be in the range of $4.99 to $5.09, and reported diluted EPS to be in the range of $4.65 to $4.77. Cells of companion animal products will be the primary growth driver in 2022, with the continuous strength of our diverse parasiticide portfolio, further expansion of our key dermatology products, the adoption of our monoclonal antibodies for ORA pain, and growth in point of care diagnostics. We also continue to see a very favorable global companion animal backdrop for 2022. For livestock, the fundamental macro trends which make animal protein an essential business remain intact, and we believe more normalized growth will occur in 2023. While guidance represents our expectations for the full year, I would like to provide some color on the expected phasing of growth for the remainder of 2022. We expect top-line operational growth for Q2 to be slightly below Q1, as regional restrictions related to COVID-19 in China temporarily pressure day-to-day business and certain supply chain activities. We also expect a similar foreign exchange impact in Q2 that we experienced in Q1, where reported revenue was negatively impacted by about 3%. In addition, the significant investments we are making early in the year to support future revenue growth, including field force expansion in the US and incremental DTC advertising will drive OPEX growth in Q2 at a faster rate than revenue, impacting Q2 bottom line profitability more materially than in the back half of the year. We expect that foreign exchange in Q2 will have a negative impact to the bottom line of about 5%. Our full year 2022 guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue. Our success is derived from our diversified portfolio of enduring brands, driven by multiple sources of in-line growth, an agile and disciplined innovation engine, and an infrastructure to develop and expand markets globally. We expect to continue to execute across multiple dimensions of our business and capitalize on favorable in-market dynamics for the foreseeable future. Now I'll hand things over to the operator to open the line for your questions. Operator?

If you would like to ask a question, At this 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 for optimal sound quality. Our first question is coming from Erin Wright of Morgan Stanley.

Great. Thanks for taking my questions. I have one on companion animal trends that I have to ask here. What are you seeing at the clinic level? If you could parse out a little bit more of what you're seeing across the U.S. and international in terms of demand trends, what you're seeing in terms of capacity constraints at the vet clinic level, and what is implied in your guidance at this point in terms of operational growth across the companion animal segment. And then a follow-up on TRIO. Where do you stand now in terms of market share and canine parasiticides at this point? And how much do you think Symparica Trio is taking share versus expanding the market with greater compliance? Thanks.

Hey, Erin, it's Kristen. Great to hear from you. So we fundamentally and structurally believe the pet care industry is in great shape. I think if you've seen some of these trends over the last few years, there's a very high standard of care. The demographics of who is adopting these pets over the last few years, being, you know, millennials, the number of pets you have out there, and honestly, the aging of pets. So we do not think there is a demand problem. I think, you know, you saw in the quarter potentially a difficult comp to what you saw last year. You know, if you look overall, you know, a 5% increase at the vet clinic, there was a little bit less traffic, as you referenced. I think those are some of those shorter-term capacity constraints. But remember, we've got a lot more pets, so you're really – the base is much larger than it's historically been. But given Omicron, there was definitely some challenges at some of the vet clinics. But the other thing to consider about the data that we would just highlight is that it really pulls out a lot of the large corporates who have found more innovative ways to structure their business to add more capacity. And I think you'll see more of that coming overall. There were the short-term labor shortages. The other thing to really focus on, we would say, If you look at Zoetis' business, it's a little different, the nature of our business and our innovation. We have a lot of chronic medications. It doesn't require tons of visits. So we focus a little bit more on the spend per visit as we look at it. We also have alternative channels, which for us in the quarter grew 34%. So we remain very optimistic with regards to pet care trends overall. And maybe, Wetman, you can take our second question on Semperica.

Yeah, sure, Erin. Look, I'm very, very pleased with the performance of Semperica Trio. posting $164 million of revenue in the quarter, up 83%, became the number one canine parasiticide in the U.S., and as we've shared before, we have 90% penetration across large corporate accounts, et cetera, and within those penetrated clinics, we continue to take share as well. Satisfaction level with our product is about 90% among pet owners, and we also just launched Sempergatrio in Japan, which is a key heartworm market as well, just in the middle of this quarter. So, very pleased with the performance of the trio.

Our next question comes from Christine Raines. William Blair.

Hi. Thanks for the question. I was just wondering if I could have an update on diagnostics contribution to the quarter and overall performance. Is growth trafficking with your expectations And can you comment on system placements versus testing volume growth and if you'd made any additional reference lab purchases? Thank you.

Yeah, sure. I'll take this, Christine. Thanks for the question. Look, we're very pleased with the performance of our diagnostics business in the quarter. We grew 12%, posting $98 million of revenue. We really saw strong growth across both U.S. and international. both replacements as well as consumables. And so we're very pleased with the performance of the business. In terms of reference lab acquisitions, we did not have any in the quarter. Obviously, we made a number of acquisitions in the U.S. and continue to make investments across technology. You might have seen images, for example. We've added additional indications here with blood smear. in addition to fecal and digital cytology. So we continue to be very pleased with the performance of the business.

Our next question comes from Louise Chen of Kantor.

Hi, congratulations on the quarter and thanks for taking my question. Just curious, what has been the impact of inflation on your animal health business, both companion and livestock? How do you see potential increase in inflation or continued inflation impacting your business going forward? Thank you.

Thanks, Louise. I'll start and then move it to Wetney. You know, we've seen historically that pet owner spending has been incredibly durable. Right now, we've got about 63% of our revenue in companion animal. And you sometimes can see a little more impact from inflation on the livestock side. But if you look at the HABRI research, 86% of pet owners would spend whatever it takes So, you know, we do see inflation, and, you know, Whitney can certainly get into, you know, how we take in price, et cetera. But, you know, I think we've, you know, obviously seen increase in labor costs and freight and fuel, but Whitney can really talk about the fact that we've been able to leverage price, especially in our companion animal business. So, Whitney, do you want to go over some of those numbers?

Yeah, sure. Given we continue to see very strong underlying demand from pet owners, we have very innovative products across our portfolio. We've been able to demonstrate that we can take price at or above inflation levels in the past, and we don't see any reason why we wouldn't do that now. If you look at this quarter, for example, our total growth included 3% of price. Now, if you parse that out and you look at just companion animal globally, we took 6% of price. And so we'll continue to use that lever as we proceed. But given the dynamics Kristen just mentioned, underlying strength in the market, we will continue to have that availability to us.

And the only thing I'd add there is, you know, despite inflation, I would just note that in 2021, we increased our margins and our guidance for 2022 does the same. So, I think it really shows the durability and resilience of our industry.

Our next question comes from Nathan Rich of Goldman Sachs.

Hi, good morning. Thanks for the questions. Christian, I'd be curious to get your view, you know, following up on the commentary you had on just vet visit trends and vet spending trends. You know, do you see more variability in sales for your products that are administered, need to be administered by the vet? And can you just remind us, you know, how big of a percentage of your companion animal business that is. And then a quick follow-up for Weteney. It looks like the revenue guidance came down by $100 million. It looks like operating profits may be down by $50 million. So it seems like a high decremental margin on the revenue reduction. I guess, does that just reflect kind of the composition of the expense space? Just be curious, kind of any color you can shed on that dynamic. Thank you.

Sure, I mean, Nate, I'll start off with your first question. Again, you know, if you look at our overall portfolio and the nature of our business, I think the level of innovation, we're not as susceptible to vet visit trends. You basically go to what percentage, you know, has to be administered in the vet clinic. You know, I don't know, maybe around 50%. That would be vaccines, injectables. But I think if you look at the sales of, you know, La Brella being now the number one pain product in Europe, you know, clearly for things that are really important to pet owners, they are getting into the clinic. You know, regular checks for vaccines, we're not seeing any significantly negative trends there. So, you know, I think chronic medications, which is a huge part of our business, and if you look at dermatology and parasiticides, which are, you know, growing at, pairs are growing at 25% in the quarter. DERM at 28% in the quarter, we're clearly not really suffering from the, you know, the slight decline in the U.S. trends. But maybe, Whitney, you can take that second question.

Yeah, sure. As we've said, we've revised our guidance solely to reflect FX. We continue to maintain our operational guidance range, both top and bottom, for the company that we came into in February that we gave. So, from an FX perspective, top line impact is about 3 percent. It's about $260 million of an impact. And as you referenced, the change you're reflecting, the change in FX, has a wider impact on the bottom. And that's really largely driven by FX gains and losses, given our exposure across certain currencies, particularly the Euro. If you look at the first quarter, for example, you see a wider impact at the bottom than you see at the top, driven by the impact of that as well.

Our next question comes from Michael Riskin of Bank of America.

Hey, guys. Thanks for taking the question, and congrats on a strong result. I want to start with livestock markets. I mean, we've known livestock was going to be weak for a while, and so it's not a huge surprise. But still, I just want to get an update on how you're seeing a couple of factors there going, both, you know, Are you still sort of projecting, lapping the tough comps around the summer? And sort of what are your expectations for drafts exiting this year and next year? And then broader conditions such as, you know, drought in the Midwest and the United States, rising input costs. Sort of how do you see that playing out for U.S. livestock and internationally? And then a follow-up question for what, Nathan, I might. You know, you guys touched a number of times in the prepared remarks on field force expansions or investing in growth, investing in the opportunities in companion animal. Just wondering if you could go into a little bit more detail on, you know, how that's going to play out. When do you see that showing up in the numbers? When do you think you'll start seeing the payoff for that? And just sort of talk about, you know, labor pressures, wage pressures, how that affects your thought process there.

great mike i'll take the first part of it which is the broader uh livestock trends and then what you can take the drax and the field force question that you've got i mean look as you know well historically livestock has grown around four percent um i think if you look at 2019 and 2020 you saw sort of some unusual events that affected overall industry livestock growth uh obviously african swine fever in china as you remember and then overall covid But then as I think as you look at 2021 and 2022, you know, Zoetis has been unusually impacted, and that has everything to do with where Draxen is. And, you know, Whitney can get into the numbers, but that has played out exactly how we expected it to. You know, our long-term outlook, as Whitney mentioned a few minutes ago in his prepared remarks, remains unchanged. We think you're going to start to go back to more normalized growth in 2023 and beyond. Basically, because feeding the world is a powerful trend, the desire for protein and higher-quality protein. But let me let Whitney get into some of the specifics on the Draxen numbers, and then your second question.

Yeah, so as we said from the very beginning, with respect to Draxen, we expected to have about a 20 percent impact to the top line in the first year and another 20 percent in the second. So what we're seeing across livestock right now is playing out exactly as we thought. In fact, in 2021, we did a little bit slightly better than that with respect to Draxen. and we continue to have the positive effects of lifecycle innovation like Draxen KP, and we're maintaining most of our volume, and the margins for Draxen remain very attractive for us as well. So as we expected, we've seen competitors come in, but the performance has been at most likely better than we expected. Broadly speaking, I think if you look at swine, for example, in China, that was a pretty significant impact on the quarter with respect to livestock. Again, we expected that coming in. and it's really looking at where swine prices are in China versus a year ago where they were at all-time highs and have been at all-time lows essentially here, and the lockdowns having an impact on sort of demand and consumption as well in this case. So with respect to the field force, if I can transition to that part of your question, very pleased to be able to expand our field force here. We have the broadest portfolio across the market, And if you look at innovation that we have coming as well with respect to the paying franchises for Silencio that we are broadly launching across the second half of this year, and as we get approval for Librella and launch that as well in the U.S., we continue to have opportunities to really capitalize on the market dynamics and the strong demand that we see and have additional fuel for us, which we see a strong return on those as well. We are also launching a dedicated field force for diagnostics separate and apart from our Rx teams, which we believe will have, again, a very positive return for us as well. Now, you can see that with those plans, we still have an operationally levered P&L, where we're going the bottom line above the top line. So, top line at 9 to 11 and the bottom at 10 to 13. with approximately a 40% increase in our field force.

Our next question comes from John Block of Stifel.

Great. Hey, guys. Good morning. Maybe just a couple quick ones. For U.S. Librella approval, you know, is that a slight push, Kristen, to year-end 22 for mid-22? If it was, maybe just if you could elaborate on what still needs to get done there for approval, and if it is year-end 22, know how are you from a supply standpoint do you think that product will be ready for early 2023 u.s launch and then maybe just you know as a quick follow-up what can you talk about the supply chain and cost and how you feel there you know companion animals expected to be a big year over year in 22 so you've got this positive mix shift you've got price running ahead of what it normally does you know you called out three percent versus one percent last year And GM is still expected to be flattish. So, just would love some color on how you're feeling in the supply chain. Thanks.

Sure. Thanks, John. I'll start with the first question and let Whitney take the second. With regards to Labrella, no, this is exactly as we expected. You know, we were expecting an approval later this year. We continue to expect that. As we wrote in the marks, there's no change there. We still require an ex-US site visit, as we've said all along. So I would say there's really no update there. And to your second question, you know, when would you expect a launch? We're obviously, you know, as we would in any product, working to build up supply. But as always in our industry, and especially with regards to biologics and monoclonal antibodies, the standard in our industry is it takes somewhere between three and nine months to get up to a full launch. So I think what you should expect next year is we'll obviously, similar to what we've done for every other product that's a monoclonal antibody. We'll do an early experience sometime in the first half, again, depending on when the approval is, and a launch shortly thereafter. We're quite excited about this. Obviously, we're working hard to build up that supply as soon as we get the approvals of the site, et cetera. So everything on La Brella is exactly where we were before, you know, really absolutely no change there.

Yeah, and I'll take the supply chain part of the question, John. Look, our supply chain has proven to be very resilient despite challenging elements over the last couple years. We delivered 15% operational growth last year, with 14 of that being volume. So, we've proven our ability to continue to navigate through those. Currently, we are looking at China, for example, where the lockdowns have had an effect, certainly in our first quarter, and we see that in our second quarter as well, which is why we include those in our prepared commentary around Q2 expectations. But in terms of price, we are pulling that leverage, saw 3% total for the company. On the companion animal side, which now is about 63 percent of our company, if you look at Q, if you look at the first quarter, you know, companion animal has grown almost 50 percent over the last two years, if you look back to 2019 levels. So, again, very strong market dynamics and demand. We do see the mix shift being very positive for us with more companion animal and with our innovative products that are launching as well. But we do have some offsets when you look at livestock, particularly Jackson. as we just talked about, in line with our expectations, but certainly are giving price and maintaining the volume, and as I said, still at attractive margins for us. But that's really the main offset if you look at it across the year.

Our next question comes from Balaji Prasad of Barclays.

Hi, good morning, and thanks for the question. companion and livestock. Firstly, on atopic dermatitis, I estimate that you currently probably have around 35% of the market share in the U.S. between So, with what percent of the incremental market is allergic dermatitis and is this market open for you as you get the label extension? On the same subject, do you also have an update on your oral JAK inhibitors, which is expected to come later this year, how that would influence your market share at all? On the livestock side, could you quantify if there are any opportunities that are coming to you through the Chinese consumption shifting towards beef and poultry with swine, or is there not much of a trend there? Thank you.

Sure. I'll start on the overall DERM. As you saw, it grew about 28% in the quarter, driven by expanding our direct-to-consumer efforts. Certainly you see we're investing more in our field force pet care rewards. And I also think genuinely it's just more people home with their pets. I don't have the specific share numbers. We can certainly get back to you on that. You know, I think it's over 70% in the US, our share of the atopic dermatitis and allergic dermatitis markets overall in the US. And especially, you know, it's even more if you want to look at revenue. But, you know, we're really pleased with where that's going. With regards to competition, I know our favorite question, We don't absolutely know. We would expect competition on this. At this point in time, as we look at 2022, we are not expecting competition in 2022. We would expect it in 2023. As our latest intelligence, obviously, we could be wrong there. But our current expectation is competition for DERM on a small molecule basis will come in 2023. With regards to our own pipeline internally, we don't discuss that. So I don't think we have any color there. But I don't know, Courtney, if you want to take the second question.

Yeah, sure. Just one thing to add on the first one. For us, really, when we look at DERM, it's less about market share. It's a lot more about market expansion. There's certainly an opportunity when we look at the number of dogs that suffer from itchiness that are not being treated, about 6 million. And of the 7.6 that are being treated, a good portion of them are undertreated with either anti-histamines or steroids. So we do think there's an opportunity with respect to the under-treatment there. Now I'll shift over to your question around livestock, particularly around China. We have seen an increase in beef consumption here, which certainly benefits us when you look at our business in Brazil, for example, that exports into China from a beef perspective, as well as in China sort of activities. And so in terms of in China, it's still relatively small compared to swine, for example, but we are seeing good trends there that are favorable to us.

Our next question comes from Chris Schott of JPMorgan.

Great. Thanks so much for the questions. Just two for me. First, can you just remind us about your sensitivity to economic growth? I know you're seeing very healthy demand on the companion side right now, and you've been able to take price. But if we enter a mild recession in some parts of the world, particularly Europe, what type of pressures would you anticipate, if any, to your business from that? And my second one was on protein demand. I know you've touched on this in a couple other questions, but it does seem like we're entering a kind of a challenging macro environment with food prices growing very rapidly, especially in the emerging markets. Do you see that as a risk at all in terms of global protein demands and consumers trading down on protein that could kind of dampen kind of your livestock recovery as we look out to kind of 2023 and beyond? Thanks so much.

Sure, thanks, Chris. Good to hear from you. As you think about the economic challenges, potential economic risk across the globe, I think one thing you've seen about the animal health industries I was referencing before, the research is 86% will spend what it takes. And I think it's also really important to focus on the fact that our companion animal business is growing 50% between 2019 And 2021, as Whitney mentioned, it was about 63%. And that is just a more durable business as you think about getting through economic challenges. We grew through the beginning of COVID, for example. You know, as you look at it, you know, we've grown during the Great Recession, and that was when our companion animal business was only 35%. So I think structurally, you know, if you look at our business, it's more positive now than it was during the Great Recession. So I do think we're going to be pretty resilient as we, you know, go through those times. But I'll let, you know, Whitney add anything there if he wants to, and then take your protein demand trend question.

Yeah, I think you covered it well in terms of companion animal. It's a bigger percentage of our business now. It's proven to be very resilient. And structurally, with respect to demographics, we have more Gen Z and millennials owning pets, more pets. And if you look across our portfolio, a number of chronic conditions that we're treating that are very resilient, even as we've seen in the past, and structurally even stronger now. With respect to livestock, you do see the potential for people to trade down in proteins going from beef down to chicken or pork and et cetera. that can happen in terms of looking across the globe. We do have a broad portfolio across different species, obviously, but that is one of the areas that we think is a little bit less than what we see in companion animal, where it's extremely resilient. Now, we do overall, though, when you look at protein consumption, we do see that growing over time, particularly as you look across emerging markets, growing populations, increase in sort of disposable income, et cetera. and growing middle class across different markets, we'd see those continuing to maintain growth with respect to protein consumption. We do have the pandemic, which actually has been negative from a livestock perspective. I think folks look at the pandemic and think about the positive effects on the companion animal side, but that has actually been largely negative. And so we do believe that in addition to our Jackson, which we've talked about, we do anticipate a return to growth in livestock as we get out into 2023-2024 timeframe.

Our next question comes from Steve Scala of Cowan.

Thank you. You mentioned enhanced spending per pet. Our understanding is that this is due to two things, enhanced compliance and catch-up in routine wellness checks. Is that what you've seen? If so, how much does each contribute? So how much does enhanced compliance contribute versus catch-up and routine visits? The concern is that the catch-up and routine visits would seem like a one-time boost. And if that's the case, then what are the long-term implications of no longer getting that boost and just enjoying the trends of the enhanced compliance?

Sure, I mean, I guess what we would say is that you're seeing more animals. You're seeing that when he's mentioned the demographics of who is adopting these animals, people who spend more time, more money on them, the aging of pets. So, I'm not sure we would probably parse the data the way you do to be perfectly honest. Obviously, we are seeing increased compliance. I think alternative channels sort of online and auto ship, even from clinics. really helping driving that increased compliance but I would say if you look at our portfolio it's innovation it's bringing disruptive innovation that you know people are excited about looking at Paris you know a single product that you know does three things you know people are excited about you look at you know monoclonal antibodies you look at dermatology we have great chronic medications that are not as susceptible to to how many visits you make. If you get a prescription prepared, it lasts the year. So I guess we would look at the data slightly differently than what you're looking at it. And more importantly, for our business, we think the nature of our business and the level of innovation and the demographics of both the number of animals and who's adopting them remains very positive.

Yeah, I would say it's a combination of just an increased standard of care for animals, particularly for pets, that's aided by the innovation that's come out of Zoetis across DERM and parasiticides and now with pain, and the demographics of the owners that actually put a premium on the health of their pets that's driving this. And I think people are doing more in those visits as well, which is driving sort of the revenue per visit figures that you see, which is, again, part of the reason that we don't think the visits themselves are as meaningful as the spend per visit.

Our next question comes from Elliott Wilbur of Raymond James.

Thanks. Good morning. I wanted to ask one of the questions around the EU launch experience and dynamics today with respect to Librella and Silencia, just how some of the early experience is shaping expectations for the U S launch areas of over underperformance, you know, where you've been positively surprised and just thinking about dynamics such as persistence. Do you have any sense of, um, the number of patients started on therapy that are, that are returning for, uh, follow-up injections, the umbrella share of new patient starts. And I know it's still relatively early. but is or are you seeing or are you expecting to see an increase in overall patient volumes from the launch of these products? Then just as a quick follow-up here, how important was or is the MAP opportunity in the U.S. in terms of driving your decision behind the Salesforce expansion? Thanks.

Sure. Thanks, Elliot. Great questions on Labrella. We are super excited at the launch there. You know, to get to some of the specific information you asked for, as we said, this is now Labrella in Europe is now the number one selling product for pain. What's really exciting also about that is 40% are patients that are new to the category. So I think this is really changing the game for a lot of people, maybe for safety reasons, couldn't take what the other products were, are really coming into the vet clinic. And to get to your other question, there's a 90% reorder rate. So which gets that, you know, if you come in for one injection, are you staying with the product? The answer is yes. And this is why we believe in its first full year in Europe alone, Librello will be a blockbuster product for us. We did about $22 million in Q1. This definitely does inform, as we think about a U.S. launch, it informs why we want to start with early experience, getting each of the vets, especially the KOLs, used to what it looks like, how to treat, how to manage it, and then really building that excitement, which worked incredibly well for us in Europe, which we'll do again In the US, and really, I think our expectations for the product have increased based on the success we've seen already. So, we're very excited as well. It's a very different market. It didn't exist before. You know, as we've talked about, we're really create a mark, creating a market. The wetness has demonstrated time and again, its ability to do that as it did in term. But again, you've got to get the cats to the clinic because, you know, they're less medicalized than dogs. You've got to help, you know, cat owners know what pain looks like. But we remain super excited about Silencia. It will just be, as we said, the ramp will look slightly different on Silencia than it does with Lobrella. But we're just as excited, and we think its potential, you know, is very strong there. Do you want to add anything, Whitney?

No, just part of the question on the field force I wanted to just make a comment on, which is, look, we have the broadest portfolio, as I mentioned before, and we continue to add innovative products to that. And so we carefully analyzed sort of the coverage across clinics and across products for our field force. And I'm very confident that this is an investment that's going to have, that's going to yield positive returns for us across our products, existing products, opportunities to expand in the existing products, as well as new products that are coming on.

This concludes our question and answer session at this time. I'd be happy to return the call to Kristen Peck, CEO, for any concluding remarks.

great um thank you all for your questions and for the continued interest in zoetis i just want to summarize i think zoetis is off to a strong start of the year uh we've got continued strength in products for pet care and i think as you've seen a diverse and durable global portfolio we're really happy to be maintaining our operational growth expectations for the full year despite the negative impact of foreign exchange and other headwinds And we're continuing to make ongoing investments in talent and technology, manufacturing expansions and innovation that have us well positioned to support our future growth plans as well. So I look forward to keeping you updated on future calls and hope you have a great day. Thanks so much, everybody.

This does conclude today's Zoetis Q1 2022 earnings call and webcast. You may now disconnect. And everyone, have a great day.