Zoetis Inc.

Q4 2022 Earnings Conference Call

2/14/2023

spk12: welcome to the fourth quarter and full year 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 the investor relations section of zoetis.com. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. 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.
spk07: Thank you, operator. Good morning, everyone, and welcome to the Zoetis fourth quarter and full year 2022 earnings call. I am joined today by Kristin 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 10-Q. Our remarks today will also include references to certain financial measures which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8K filing, dated today, Tuesday, February 14, 2023. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristen.
spk08: Thank you, Steve, and welcome, everyone, to our fourth quarter and full year 2022 earnings call. Today, we reported strong full-year results for 2022, in line with the high end of our guidance from November, and thanks to our diverse portfolio, global scale, and talented colleagues. Our 8% operational revenue growth for the year was driven by our innovative companion animal portfolio, which grew 14% operationally, while our livestock portfolio declined 2% operationally, primarily due to generic competition and market challenges, especially in the U.S. Thanks to our broad global scale and diversity, we delivered well-balanced operational growth across our U.S. and international segments, which grew 7% and 9% respectively. For the year, we generated operational growth in all of our top 13 markets, despite the economic challenges, continued COVID recovery, and political uncertainty created by the war in Ukraine. Reflecting our longstanding value proposition, we grew our adjusted net income faster than sales for the year, with an operational increase of 11% for the full year. And we use this performance and financial strength to continue investing in the R&D, manufacturing capacity, and sales and marketing resources to support our future growth and pipeline. As we begin 2023, we will stay adaptable to the evolving macroeconomic factors and geopolitical tensions around the world and focus on executing our plans. We remain very confident in the fundamental and resilient global demand for animal care. And most importantly, we are confident in Zoetis' ability to continue delivering solid, sustainable growth as we resolve our prior supply constraints and build share of our market-leading franchises. Looking ahead, we are committed to our track record of value creation and above-market performance, even in the face of today's economic uncertainty. We are well positioned with our strategic priorities and capabilities to expand in large and growing product areas like parasiticides, dermatology products, monoclonal antibodies, vaccines, and diagnostics. We are guiding to a range of 6% to 8% operational growth for revenue in 2023 and adjusted net income growth in the range of 7% to 9% operationally, which reflects our increased investment plans for R&D and manufacturing to support growth. As a world leader in animal health, a market that has grown on average of five to six percent through various economic cycles over the last two decades, we feel very positive about how our portfolio, pipeline, and strategies can drive long-term sustainable growth and create value for our customers and shareholders. Whitney will discuss more details about the 4Q results and full year 2023 guidance, but let me provide some additional perspectives on our business and set the stage for some of our growth drivers for the year. First, we have remained the world leader in animal health over the last decade, outperforming the market and bringing groundbreaking innovation to veterinarians, producers, and pet owners who care for animals. We marked our 10-year anniversary as a public company on February 1st, a decade which saw us bring more than 2,000 new products and lifecycle innovations to market, build a diverse portfolio featuring market-leading franchises and 15 current blockbusters, generate consistent above-market revenue growth, and deliver a total shareholder return of more than 500%, all while increasing our market cap from $16 billion in 2013 to about $75 billion today. While we celebrate those accomplishments, I'm even more excited about where we can go in the next decade, and by the talented colleagues, innovative pipeline, and best-in-class capabilities we have brought together at Zoetis. Our colleagues' purpose-driven mindset and steady performance in the face of adversity give me confidence in the continued execution, innovation, growth, and durability of our business. As we turn to 2023, we're focused on five key growth catalysts for the year in dermatology, we see excellent growth opportunities, even after nearly a decade of game-changing innovation that began with the introduction of Apoquil in 2014 and has continued with the success of our first monoclonal antibody, Cytopoint, as well as recent lifecycle innovations like Apoquil Chewable. We continue to see even more opportunity to grow and expand in this market. In pet parasiticides, the largest single product area in animal health, We continue to gain share and are now the second largest in revenue for this category. We've improved supply in 2023. We expect to continue expanding share in this market and supporting our diverse global portfolio, featuring Sempergatrio, our triple combination product. In the area of pain, we are off to a great start with our two monoclonal antibodies for osteoarthritis pain, Labrella for dogs, which became our latest blockbuster in 2022, and Silencia for cats. We are once again revolutionizing care in this category and seeing very positive early reaction to both products in their market as we continue to expand geographies and supply. In terms of the U.S. approval for La Barla, we remain confident in receiving approval in the first half of 23 with a plan for late in the year. In diagnostics, we continue to generate solid above-market growth in international markets, evolve our go-to-market model in the U.S., and drive greater global adoption for vet scan images, our AI-based diagnostics platform. And finally, as population growth and economic mobility drive more demand for animal protein in pets, we see major opportunities in fast-growing emerging markets outside the U.S. where our portfolio is well-suited to meet those evolving needs. Overall, our business continues to be weighted toward higher growth, innovation-driven areas in companion animals, and these will remain our growth drivers for the foreseeable future. Meanwhile, our livestock portfolio will remain a valuable, cash-generating piece of our business as we continue to recover in the U.S. from generic competition and show solid growth in emerging markets. As always, we will stay disciplined yet adaptable in our approach to the new market opportunities, potential challenges, and economic shifts that could occur. And in conclusion, Zoetis remains well positioned in terms of our market leadership, financial strength, investment strategies, and diverse portfolio to deliver sustainable growth in 2023. Thank you, and I'll hand this off to Watney.
spk04: Thank you, Kristen, and good morning, everyone. As Kristen mentioned, We had a strong year in 2022 with revenue of $8.1 billion and adjusted net income of $2.3 billion, both in line with the high end of our November full-year guidance range. Full-year revenue grew 4% on a reported basis and 8% operationally, with adjusted net income increasing 3% on a reported basis and 11% operationally. Looking deeper into the operational growth for the year, price contributed 3% to full-year operational revenue growth, with volume contributing 5%. Volume growth consisted of 4% from new products, including Semperica Trio and our monoclonal antibodies, Labella and Silencia, and 2% from key dermatology products, partially offset by a decline of 1% from other inline products. Revenue growth was broad-based, with positive operational growth in each of our top 13 markets, which make up approximately 85% of our total revenues, with international growing 9% operationally and the U.S. growing 7%. Our growth was driven by continued demand for our innovative new products in our companion animal portfolio, which were 14% operational. Our companion animal portfolio now makes up 64% of our global revenues. This growth was partially offset by our livestock business, which declined 2% operationally, primarily due to the generic competition, supply constraints, as well as challenging market conditions in certain geographies. Performance in companion animal was driven by our small animal parasitic type portfolio, which was 20% on an operational basis. Semperica TRIO generated $744 million in sales, growing 58% on an operational basis. Our Semperica franchise reached $1 billion in global revenue for the first time in 2022. Our T-dermatology products generated $1.3 billion in sales, posting strong growth of 17% operationally with double-digit growth in both international and the U.S. T-derm grew Growth in our international markets was especially strong at 27% operationally. We continue to see solid growth in our monoclonal antibodies for psoriasis pain. As expected, sales of Lubella eclipsed the $100 million mark on the year, marking Zoetis' 15th blockbuster product. We look forward to Lubella's expected launch in the U.S. in late 2023. Celentia contributed $30 million in sales in 2022, primarily from international markets, with solid plain penetration in the U.S. after launch late in the year. Our comparing animal diagnostics portfolio declined 2% operationally in the year, with declines in the U.S. partially offset by growth internationally. Our livestock business declined 2% on an operational basis. Our portfolio continues to be challenged by generic and cheaper alternatives to Jackson in cattle, as well as Zoramix in poultry. We do expect these generic impacts to begin to moderate in 2023. Additional declines were driven by supply challenges on certain livestock products, as well as unfavorable market conditions, especially the U.S. cattle and China's wine markets. Moving on to our Q4 financial results, which was another strong quarter. We closed Q4 with revenue of $2 billion, representing an increase of 4% on a reported basis and 9% on an operational basis. Adjusted net income of $539 million is an increase of 14% on a reported basis, and 27% operationally. Of the 9% operational revenue growth, 3% is from price and 6% from volume. Volume growth consisted of 3% from new products, which includes Impericatrio, as well as Lubella and Silencia, and 2% from key dermatology products, while other in-line products grew 1%. Companion Animal products grew 15% operationally, while our livestock portfolio was flat in the quarter. Semperica TRIO was the largest contributor to growth in the quarter, posting global revenue of $171 million, representing operational growth of 39% for the quarter. We expect Semperica TRIO to continue to grow the addressable market for flea, pig, and heartworm globally and drive the conversion from collar and topical parasiticides to oral combination products. These dynamics will provide additional runway for future expansion of the broader market and revenue growth for TRIO, even once competing tubal combination products enter the market. Our key dermatology products, Apoquil and Cytopoint, had solid global growth in the quarter, posting $347 million of revenue, representing 14% operational growth, against a robust prior year in which Key Derm grew 23% operationally in the fourth quarter of 2021. Our monoclonal antibodies, Wall Street Thrives Pain in dogs and cats, continue to grow, posting $39 million of revenue in the quarter, primarily in international markets. Meanwhile, Sales of livestock products were flat on an operational basis in the quarter, with growth in fish and poultry offset by the impact of generics and supply constraints on cattle and swine products. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.1 billion in the quarter, growing 7%, with companion animal sales growing 12% and livestock sales declining by 6%. Focusing first on companion animal, we returned to double-digit growth in the quarter, as we resolved the majority of our supply issues from earlier in the year. In the U.S., veterinary practice revenue is growing approximately 6%, and spending per visit remains strong again this quarter, increasing 10%, despite a 4% decline in clinic visits in the quarter. The visit decline reflects comparison to the peak visit numbers in 2021, driven by pandemic aftereffects and increased adoption of pets, as well as the impact of veterinary workforce challenges that have limited some clinic capacities. Absolute clinic visits remain above pre-pandemic levels. We continue to see growth in the retail segment, outpacing other channels. In Q4, sales to our retail partners grew by 49%. Temerica Trudeau continues to drive growth in the quarter, with sales of $158 million in the US growing 39%. With the supply constraints from earlier in the year largely resolved, we were able to leverage promotional efforts to drive growth and regain market share in the quarter. Key dermatology product sales in the U.S. were $239 million for the quarter, growing 11%, with Apoquil and CiderPoint each growing double digits. We expect a continuing expansion of the market for the foreseeable future. U.S. livestock declined 6% in the quarter, as expected, with sales of cattle products impacted by supply restocking for certain products in the third quarter of 2022, as well as the impact of generic competition in cattle and poultry. Moving on to our international segment, where revenue was flat on a reported basis and grew 12% operationally in the quarter. International companion animal revenue grew 21% operationally, and livestock grew 4% operationally. Increased sales of companion animal products resulted from growth in our parasiticides portfolio, our key dermatology products, and our monoclonal antibodies for alleviation of osteoarthritis pain. Our international small animal parasiticide portfolio had a very strong quarter. Growth was driven by our Revolution franchise, which rebounded well from supply challenges, especially in China. Our key dermatology products contributed $108 million to revenue and grew 22% on an operational basis in the quarter, with growth in Cytopoint across all key markets, and continued double-digit growth of ApriQuo. We continue to be pleased with the performance of our OA Paying portfolio, with Lubrella generating $26 million and Cilentia delivering $7 million in fourth quarter sales internationally. Lubrella sales in the quarter dipped slightly below the prior quarter due to the removal of supply allocation in certain markets, which led to higher inventory levels at the end of Q3. We expect to see significant contribution to growth in 2023 coming from Labella across our international segment. Moving on to our international livestock segment, which grew 4% operationally in the quarter. Our fish portfolio grew 25% operationally due to increased demand for vaccines in key salmon markets, including Norway and Chile. Sales of poultry products grew due to increased demand for poultry 14. Growth was partially offset by swine sales, which declined due to supply constraints in certain vaccines across international. The swine decline was partially offset by growth in China driven by a weak comparative quarter in the prior year and improved swine market conditions. Now moving on to the rest of the P&L for the quarter. Adjusted growth margins of 68.1% decreased 150 basis points on a reported basis compared to the prior year. resulting primarily from unfavorable food and exchange impacts. Operation only gross margin declined 60 basis points, given by higher inventory charges, as well as higher manufacturing and freight costs, which were partially offset by favorable price and mix. Operation only adjusted operating expenses decreased 6%, with SG&A declining 9%, driven by lower compensation related expenses and lower advertising and promotion, partially offset by higher freight and logistics related expenses. R&D expenses increased 10% operationally due to higher compensation costs and higher project spend. The adjusted effective tax rate for the quarter was 20.8%, an increase of 220 basis points, primarily due to lower net discrete tax benefits in the quarter and a lower benefit in the U.S. related to foreign-derived intangible income. Adjusted net income grew 27% operationally, and adjusted diluted EPS grew 30% operationally for the quarter. Capital expenditures in the fourth quarter were $171 million. In the quarter, we repurchased approximately $400 million of Zoetis shares and returned over half a billion dollars to shareholders through a combination of share repurchases and dividends. For the year, we have repurchased almost $1.6 billion of Zoetis shares and returned over $2.2 billion to shareholders. In December, we announced a 15% annual dividend increase continuing our commitment to grow our dividend at or faster than the growth in adjusted net income. Now moving on to our guidance for the full year 2023. Please note that guidance reflects point exchange rates as of late January. We are expecting point exchange to have a minimal impact versus the prior year, with the full year impact neutral at revenue and slightly accretive at adjusted net income. The foreign exchange impact in the first half will be unfavorable versus prior year, particularly in the first quarter. In the second half of the year, foreign exchange is expected to be favorable based on the late January exchange rates. For 2023, we are projecting revenue between $8.575 and $8.725 billion, representing a range of 6% to 8% operational growth. Volume will be 1 to 2% at the low end of our guidance range, and 3 to 4% at the high end. We again expect companion animal to be the primary growth driver in 2023, with the continuous strength of our diverse parasitic site portfolio, the adoption of our monoclonal antibodies for OA pain, and further expansion of our key dermatology products. Despite the decline in vet clinic visits last year, industry fundamentals remain strong. Visits remain above pre-COVID levels, and clinic revenue is at an all-time high as the standard of care continues to increase. We anticipate modest lifestyle declines in 2023, driven by the generic impact on Jackson sales, particularly in the first half, as well as unfavorable market conditions in U.S. cattle. These declines will be partially offset by growth in poultry, driven by increased demand for poultry protein and new product launches, as well as fish. The fundamental trends which make livestock an essential business remain intact. I'd like to touch upon the key assumptions that underpin our expectations for revenue growth. For companion animal, we assume a triple combination product will launch in the U.S. in the first half of 2023 to compete against Empirica TRIO. We expect this entrant will help TRIO drive the conversion from topicals and collars to triple combination or parasiticides and still project significant growth for TRIO. We do not expect competitive entrance in 2023 for our key dermatology products, Apoquil and CiderPoint. We expect another year of robust growth of our key derm portfolio coming from continued expansion of the dermatology market and price. We are excited about the continued growth in our OA franchise and plan to launch in several new markets next year. For the remainder of the P&L, adjusted cost of sales as a percentage of revenue is expected to be in the range of 29.5% to 30%, where favorable foreign exchange price increases and product mix are partially offset by higher input costs. Adjusted SG&A expenses for the year are expected to be between $2.06 and $2.1 billion, with the increase from 2022 focused on supporting primary drivers of revenue growth. Adjusted R&D expenses for 2023 is expected to be between $635 and $660 million. R&D spend can fluctuate year over year. This increased investment is reflective of both new projects as well as those advancing in our pipeline. Zoetis is the leader in animal health because of the disruptive innovation, novel products, and life cycle enhancements we bring to the market. This increase in R&D expenses reflects our commitment to ensuring our capital allocation prioritizes innovation. Adjusted interest and other income deductions are expected to be approximately $170 million. Our adjusted effective tax rate for 2023 is expected to be in the range of 20% to 21%. Adjusted net income is expected to be in the range of 2.49 to $2.54 billion, representing operational growth of 7% to 9%. Our guidance, once again, reflects a value proposition of growing revenue in line with or faster than the market, and growing adjusted net income faster than revenue. We expect adjusted diluted EPS to be in the range of $5.34 to $5.44, and reported diluted EPS to be in the range of $5.03 to $5.14. We are anticipating capital expenditures in 2023 to increase to $950 million to $1 billion. We continue to make investments to support our future growth, including manufacturing capacity for our monoclonal antibodies, as well as oral solid dosage. Finally, while Zoetis and the animal health industry remain resilient in the face of economic headwinds, our 2023 guidance range is reflective of uncertain macroeconomic conditions and the impact of veterinary clinic labor challenges. While guidance represents our expectations for the full year, Q1 revenue is expected to be below the low end of the operational growth rate in our full year guidance due to a variety of reasons. First, Q1 2022 was a strong comparable quarter as we saw robust growth with limited impact on vet clinic labor constraints, as well as minimal disruption from our diagnostic field force model change, which began in Q2. Additionally, in the quarter, we expect to see lingering impacts of the latest COVID wave in China. Lastly, the return of supply on certain products, including and subsequent channel restocking, as well as promotions to regain share in Q4 2022, modestly increased inventory levels in the channel in the short term. In Q1, we expect a modest decline in adjusted net income versus the prior year, and the result of the timing of our 2022 fill force expansion in the U.S. which did not start until Q2, as well as the R&D investment noted earlier, which is also of a low base in Q1 2022. Now to summarize. 2022 was another strong year. Despite some challenges, we significantly outperformed the market and continued to take share, all while growing the bottom line faster than the top line. As we begin 2023, we once again expect to grow faster than the market, driven by the strength of our innovative portfolio our ability to successfully launch new products and expand existing markets, and our confidence in the end market dynamics for the spaces we compete in. Now, I'll hand things over to the operator to open the line for your questions. Operator?
spk12: At this time, we will open the floor for questions. If you'd like to ask a question, please press the star key followed by the one key on your touchtone phone. If at any time you'd like to remove yourself from the questioning queue, press star two. Please limit your questions to one at a time. Again, to ask a question, please press star 1. We'll take our first question from Michael Ruskin from Bank of America.
spk14: Great. Thanks for taking the question, and congrats on the quarter, guys. I'm going to throw in a couple just real quick. First, we'd love to get your latest thoughts on NextGuard Plus, the BI triple combo now that it's been unveiled at BMX. Just what are your expectations for Sympirica Trio growth this year, if you could give us a ballpark for that. And then second, I want to talk about R&D spend in 2023. It seems to have jumped quite a lot year over year, and that's a big part of why operating margins aren't expanding as much as we're used to. Any specific programs you want to highlight and anything you can say in terms of when that R&D spend will translate into future launches? Is this something that's sort of in the regulatory phase or late clinical phase? Just give us a sense of where the extra $100 million year over year is going.
spk08: Sure, thanks Mike. I'll take those and let's see if Whitney has anything to add. The first on TRIO, obviously we had a phenomenal year with 58% growth. Really proud of that. You know, obviously we got back in clinics after some of the supply problems and we're fully back there. We've got 90% penetration with an 80% reorder rate and are now the number two flea tick heartworm there. We are expecting competition from Nexstar Plus sometime in the first half. We actually, as I'm sure you know, don't know exactly when that will be. But we continue to expect the market to expand, and we continue to expect Comparacatrio to be growing on the year. I mean, I'll be at probably not at 58%. But we expect to have a very strong year. I think what you're going to see is really moving more customers from collars and topicals into, you know, what is a best-in-class flea tech heartworm combined oral product. So we expect to continue to go through this, as we've continued to say. We don't have any more information on the exact timing there. But we're going to be aggressive, as you've seen us in Q4 and Q1, you know, really investing behind this brand, doing DTC, et cetera. So we expect strong growth there, continuing even with a new entrant. And when you think about R&D spend, and I'll start and see if Watney wants to build there, you know, we've gotten questions often from you and from a lot of our investors, you know, why don't you spend more in R&D or if you had a program, would you invest in it? And I think what we're demonstrating is we see a very strong pipeline here. These incremental investments to your question are certainly the bigger ones are in late stage development going into development that cost that, but also some great new technologies in the research side as well. So, It's brought across the portfolio. It is a significant investment. And hopefully it's a sign to all of you of our confidence in our pipeline and the strength of our R&D engine and our willingness to invest in that for the short and the long term across there. We see, you know, obviously really big platforms there in parasiticides, continuing to invest there in dermatology and across our monoclonal antibody franchise. certainly looking at long-acting as we've talked about, but also new disease areas. So I don't know if I missed anything. Whitney, do you want anything?
spk04: No, look, I'll just add a couple points going back to Shrio. We expect, as Kristen said, for Shrio to grow significantly in the year, although as we now are well into our third year with the product, we wouldn't expect it to continue to grow at 58%, which is what it did in 2022. Now, the timing of our supply recovery in 2022, And the fact that as we see competition come in, it may drive some promotional activities that might drive some variability in terms of quarter to quarter in terms of where the growth is. But for the total year, we expect significant growth on TRIO. And then on the R&D spend, it's our practice that we don't actually dictate what the investment in R&D is going to be. We let the pipeline dictate it. And so as we see programs either coming into research or coming out of research into development or into late development, as those programs require spending and we do a full ROI spec, et cetera, on them, we go ahead and fund those. And so we're very pleased to see that the pipeline is demanding this level of investment and we'll still be able to deliver faster growth at AMI than revenue based on our guide of 68 at revenue and 79 at adjusted net income.
spk12: Our next question comes from John Block from Stiefel.
spk06: Great. Thanks, guys, and good morning. Wendy, the 4QGM of 68.1 was a little bit below us for the quarter, but the 2023 guidance at 70 to 70.5 was certainly solid. So maybe if you can just talk to the drivers for 23 gross margin of those, you know, the supply chain easing, maybe a little bit about the cadence. And then, you know, maybe just sort of as a tack on to that or the second question, in 2022, it was sort of a tale of two halves for atopic derm. 1H was, you know, operational around 20%. 2H operational, I think, was closer to 10%. I think you guys alluded to solid growth in 23, but do you want to just frame that for us? Is it a continued deceleration of atopic derm into 23 with no competition? Because I think you clarified that. Or can we expect some level of stabilization, call it in that, you know, high single, low double-digit range for the atopic derm franchise? Thanks, guys.
spk04: Yeah, so I'll start and see if Kristen would add anything here. Let's start with gross margins. Look, if you look at the year, we were able to expand margins on the year. And certainly, as we explained in the prepared commentary, we saw FX come in. to the tune of about 80 basis point of headwind against gross margin in the fourth quarter. And certainly we've seen input costs as well as the manufacturing costs impact the gross margin picture that you saw in the fourth quarter. But given where OPEX came in, you saw substantial growth at ANI versus revenue, where revenue came in at 9% on the quarter, ANI coming in 27% growth on the quarter. I think as we go into 2023, Given the timing of our price increases, which started at the beginning of the year, as you know, certainly we've seen some inflation and input costs coming out of 22, but we're going to 23 price increases that start to change that as we go into 23, which is why we give guidance where we see about 40 basis point gross margin expansion on the year. And obviously, if you look at the midpoint of our guidance, growth higher at A&I versus versus the top line is what I would say on the margin fund. Certainly, as you look at continued growth of companion animal, pacing the growth of livestock in the business, that mix will be favorable to us in addition to what I already covered from a price perspective. I think if you look at Atopic Derm, we delivered $1.3 billion of revenue in 2022. That's a 17% increase, and we're almost at 10 years since since Apoquil was launched and just amazing to see that we continue to expand the market and we believe there's more room to expand, not only in the U.S. where we grew 12% in 2022, but particularly in international markets where it takes longer to get to peak sales levels and we delivered 27% growth in international. I think we'll continue to see really solid growth across the business. We actually had double-digit growth in 2023, though it may not be at the level that you've seen in 2021 where we grew, I think, about 23% and then 17% in 2022. But we continue to see room to continue to expand the Durham market here.
spk12: Our next question comes from Erin Wright from Morgan Stanley.
spk09: Great, thanks. So two questions here. One, how much did the lingering supply chain issues impact some Perica Trio sales in the quarter, if at all? And how much did the stocking benefit offset that in the fourth quarter? And did you benefit across other product lines in terms of distributor stocking that we should be aware of in terms of that first quarter cadence as well? And just if you could talk a little bit more, and maybe you touched on this with the gross margin dynamic, but in terms of overall price you are taking across the two core species segments here. And then my second question is on Librella. Can you give us an update on the U.S. Librella approval? And what does guidance assume in terms of U.S. contribution from Librella as that material in 2023? Thanks.
spk04: Yeah, so let me first touch on your questions around supply and its trio as well as other products. As we said in the third quarter call, while we had some outages in supply during the year, particularly in the third quarter, competitors actually took advantage of that and ran promotions. And we certainly intended to run promotions as we recovered on supply, which we did. In the fourth quarter, and so I think the timing of our supply recovery, whether it's for trio in the US or for revolution in China will drive some stocking levels certainly as we enter into 2023, which we discussed. But I think I think typically you'll see some increase in inventory levels from Q3 to Q4 anyway. Because distributors are anticipating our price increases, and they tend to drive a little bit of that. So, I would say, when I look at across other products, it's probably more in the range of typical increase that you would see. But if you look at TRIO, we're probably, if I had to bracket it in terms of the impact on TRIO, if you back out, what would typically be an increase from Q3, Q4 anyway. So, the incremental contribution in the fourth quarter, I'd put somewhere in the 25 to $30 million range. So, it's not a significant number. For us, and certainly as we've discussed already, we factor that into our guidance, and we expect significant growth from TRIO on the year. With respect to La Brella, look, we continue to expect and are very confident that we will see an approval in La Brella in the first half of the year. Our plans have not changed. We continue to plan to have an early experience program run on the program once we've gotten approval and we have the label set, et cetera, and that will transition into a launch sometime late in the year.
spk08: And our practice, just to build on that, our practice on that is that we do not include in our guidance or our budgets if we're expecting a late launch in the year. We've always done that as those have covered us for a while. So Librella is not in our current guidance that we provided. We will update the guidance once we have a better sense. Obviously, this is a big product, and when it launches, it could have a big impact. So whether or not you have one month, three months, you know, etc., four months, it makes a big difference. So, we'll update guidance once we have a better sense of that approval. So, to clarify your second question, Librella is not in the guidance that we provided. We fully do expect to have it, but we'll update our guidance once we have a better sense of what the exact timing is.
spk04: Yeah, and we'll give a better bracket in terms of what we expect the impact to be, depending on the timing of the launch and what we see through the EEP program, et cetera.
spk12: Our next question comes from Louise Chen from Cantor.
spk10: Hi, thanks for taking my question here. So, I wanted to see if you could give more color on how you're investing in supply to meet the growing demand for your products, and when you exactly, you know, expect to complete or reach your objectives here. Thank you.
spk04: Yeah, I'll take that and see if Christian would add on anything. We are investing in a number of areas when it comes to our supply network. I'll put a couple of categories I'd say in the short or near term. We have investments clearly in inventory to help absorb any shocks that come through the supply chain. We're making investments in our demand planning processes and tools to give us better visibility, et cetera, as well as redundancies that we're building in in certain aspects of our inputs coming into our manufacturing process. Longer term, as you may have listened on the prepared commentary, we're making significant capital investments across our network, across the network in the U.S. to support our monoclonal antibodies, both for products that have already been approved and are launching, and what we have in our pipeline as well from a MAP perspective. It is a platform that we continue to innovate on. And then our all-solid dose as well, whether it's parasiticides, and various aspects, we are making investments throughout the network for those who are making investments to support Our vector vaccine manufacturing, for example, as well for livestock and so on. So we are making investments across the organization investments in tech and digital to leverage data again to give us better visibility as well for the long term to support our long term growth aspirations.
spk08: The only thing I build on there Louise is, I mean, if you look at the capex number that Whitney was talking about in his prepared remarks, That is clearly the highest CapEx that we've had. But I also think you should, you know, look also at what we said about R&D. And if you look at significant new investments in R&D, those are going to be products that we're going to have to be able to manufacture in a few years. So, what you're seeing is the commensurate investment in our manufacturing capabilities to be able to launch those products in really critical platforms across the globe. So, you know, we are very confident in where our pipeline is, and we're going to invest in our manufacturing capacity. to deliver on those products over the medium to long term.
spk12: Our next question comes from Nathan Rich from Goldman Sachs.
spk13: Hi, good morning. Thanks for the questions. The first one on TRIO, I'd be curious just to get a sense of what kind of factors you're watching as you think about the impact that competition could have and, you know, magnitudes that would kind of push you to the higher or lower end of your range for competition. And are you anticipating any changes to pricing or your promotional cadence when competition enters? And then my second question on Draxen Just how much of a drag will that continue to be in 2023? I think you've previously said that you'll start to cycle the second year of competitive entry in the first quarter, but I think there's been some more recent price changes. So just curious what we should expect in terms of the impact on the livestock business this year.
spk08: Sure, Nate. I'll take the first question, and I'll let Whitney take your second question on Draxen. Look, we've been expecting competition for a long time on TRIO, I would say. So I would say we are well prepared for what that is. We've been investing heavily, obviously, behind DTC, really investing with our customers and with pet owners directly to make sure that when competition enters that we have very pleased customers. And a few things I'll point to there. Obviously, it's our direct-to-consumer advertising. I would say our broad portfolio and our, you know, if you look at our relationship with corporate accounts, we're very strong with corporate accounts. We are their preferred product, so I think that provides some resiliency. But I'd also say auto ship remains a real strength. This is not a sector where people often switch unless there's a really good reason. So a new dog, they'll make a choice. But I think customers who are already on our product are not going to be that inspired to change. And if you look at the dynamics, certainly in the U.S. around retail, it grew 43% on the year. It's now about 11% of our U.S. business. And I highlight that because the more that insulates us from potential new entrants coming, and we obviously expect NextGuard Plus, but I'm sure there'll be others over the next one to two years that enter as well. So we're really investing in insulating ourselves from that impact by investing in pet owner loyalty programs, DTC, a broad portfolio with innovation with our customers wanting to do, corporate accounts I'd also underscore, and then lastly, auto ship and strong relationships with the retail sector. Do you want to take the second question on Jackson?
spk04: Yeah, absolutely. Look, as we said, from the very beginning, we were expecting Jackson to have about a twenty percent decline in the first year of generic competition. And then another twenty percent in the second year, the first year was slightly better than than our expectations coming in somewhere on sixteen percent decline. But the second year was a little bit worse. So I think we're sort of in that ballpark. I think second year was about twenty five percent. So we're at a level now that once we lap, I would say, the second year, which would be through the first quarter of 23, which is why in the preliminary commentary we said, particularly in the first quarter, I think we're at a low enough level where it won't be as meaningful as an impact on us. And I think the drag on our overall livestock business won't be as significant. So I would still expect some pressure on livestock, given where U.S. cattle, for example, as a market is. We're watching swine, particularly in China, and the impact it has across other regions to determine where we end up lending. But we think livestock will be, you know, slightly down year on year, maybe marginally better than you saw in 2023 where livestock was down 2%.
spk12: Our next question comes from David Westenberg from Piper Sandler.
spk00: Hi. Thank you for taking the question. So I want to kind of continue with some of the TRIO dynamics. Can you talk about maybe if you got any word on in terms of what the label might look like on the competitive launch? And can you give a little bit more color? I think you said in the prepared remarks that you expected to come from colors and topical. What are you kind of seeing in the marketplace that suggests that as opposed to other maybe legacy oral parasiticides? And then kind of the second question here is on the increase in R&D spending. Are you going to continue to give out some of what you have in pipeline? I think you guys usually give out six months in advance to Wall Street. Is that still the expectation when you talk about pipeline? Thank you very much.
spk08: Hi, Dave. I'll start on TRIO and then maybe Whitney can clarify because there's anything I'm missing and then I'll let Whitney take the R&D question as well. Look, we don't have any clear signs of what the label of competition will be. We're very confident in our current label. We don't think it has any holes. I've got to tell you, we're at 100% heartworm protection. So I'm not really sure where you're going to hit us on that. We've also been out on the market now since 2020 with this, which means we have a very strong set of safety data as well. So, you know, I'm sure, as always, competition will enter and they'll try to find any angle they can. But we don't really think there's any holes in our label right now that we're concerned about. We're in puppies, you know, if you look back to Semperica. And the second part of your question, you know, look, yes, they will move from single agents. I think they will. Single agents, you know, from just, you know, flea tick or just heartworm products. I think we'll move into the combination labels for sure. But we're not expecting pricing to be a big factor initially. And really that has to do with who's entering. Because if they don't enter the market, you know, similarly priced or higher than their current two products, they're going to cannibalize themselves. So, you know, I think really the power of who's entering does not lead us to believe that price is going to be a major factor in who enters. I mean, obviously, we'll adapt to whatever comes, whatever label they have. But we remain very confident in our label, in our relationships, and in our data today. But do you want to take the second question on R&D, Whitney?
spk04: Yeah, look, the only small addition I would do to Trio is we do get to 100% heartworm after the first dose. So, and with the product being on the market almost three years, and satisfaction levels being very high in penetration across clinics, et cetera, we're very confident on our position as competition enters into the space. On R&D, look, I think, you know, unlike human health and animal health, there's not as much visibility that's given with respect to what's being specifically worked in the pipeline. We see that as a competitive advantage for us given our track record and how we continue to drive innovation in the spaces that we enter. And so we won't necessarily be changing that significantly here in terms of what we have in here, but we have talked about various aspects of unmet needs that if you were to ask veterinary practitioners what are the top five or 10 unmet needs that they have, I think you would imagine that we're working on all of those areas.
spk12: Our next question comes from Chris Shaw from JP Morgan.
spk02: Great. Thanks so much. I just had a question on the overall volume comments you made. I think it was 1% to 2% volume growth at the low end versus 3% to 4% at the high end. Can you just elaborate on the dynamics there? So how does that look for companion versus livestock? And maybe as part of that, what's implied in terms of that visit growth this year? And is that even a relevant swing factor as you think of the overall outlook for the business? Thank you.
spk04: Yeah, so look, I think, you know, if you look at our 2022 results, the net price contribution is about 3%. Now, if you take Jackson out, that number is about 4%, and companion animal would be at the higher number here, with certain products substantially above that. Now, we're very pleased to be able to take price, which typically is about 2% to 3%, and here in 2022 is about double what we would normally do, and we still saw about 5% volume growth in 2022. So, as we look at 2023, I think you'd see price with Jackson impact being less than it was in 22 in particular, plus, you know, how we're going into pricing certain products, I think you can expect a higher price contribution on the year, the timing of that in terms of, you know, where customers may have bought ahead of the price increases and so on. So, you might see a little bit of a lag in terms of when you see the price picture play out, but you'd see at the low end of our range, price is a bigger contributor, but at the upper end, it's all additional volume. In terms of where we see vet clinic traffic, certainly we've seen vet visits come down versus the peak that we saw in 2021. In the fourth quarter, visits were down about 4%, but revenue per visit was up 10%, and total revenue was up 6% on the quarter. Again, continuing the trend that we see as being sustainable, which is pet owners willing to pay for innovation and seeing sustainably higher revenue for vet clients. Now, we're still very early in 2023, but as we look at data in January, we are seeing some increases in vet visits. Again, as we expected, we've been running above pre-pandemic levels. So, even in Q4, where visits were down 4%, they were actually still 2% above Q4 2019. And so we've been saying that that's the element to continue to watch. I think one month is a little bit early to call it, but we are expecting visits to be flat to up in 2023, and we're starting to see some signals of that earlier in the year.
spk12: Our next question comes from Brandon Vasquez from William Blair.
spk05: Hi, everyone. Thanks for taking the question. My first is just on the diagnostic side. You guys have, I believe, talked about this before, but maybe can you refresh us on where you are on some of the commercial changes? I think it was in the U.S., where those are and what that might mean for growth and potentially accelerating that business into 23 plus. And the other is just on China. You guys had a nice rebound there. I think you mentioned a little bit of supply coming back on the market, but maybe tempered that a little bit with COVID headwinds. So curious how those two shake out maybe a month and a half into this first quarter. Thanks. Sure, Brendan.
spk08: I'll start and let Whitney build on both of them. So in diagnostics, first of all, just, you know, Brittany and I are joining you from our national sales meeting actually out in Denver, and I would say the energy in our diagnostics team is just amazing. So, you know, we'll, as, you know, Whitney mentioned in his prepared remarks, you know, Q1, you know, was a little different. We didn't have them on board until Q2 of 2022. So, what we are expecting as we look into 2022, as we get into the, you know, sort of middles of the year and the end of the year is really a return to at least market growth in the U.S., if not, you know, faster. We continue to see very strong growth in international, as you saw from last year. And we expect that to continue into the year. So, you know, we're really excited about the new field force, having them on the ground, having them, you know, fully up to speed. You know, Whitney and I spent a lot of time with them yesterday. So I would say super optimistic overall in, you know, diagnostics, returning to growth across the board, certainly the images platform and investments there. And then I'll start on China and let's see what Whitney has to build on it. You know, we did see overall strong growth in the year of 11%. And, you know, we're optimistic so far year to date in sort of the return in China. We've seen both on the companion animal side, you know, a really strong rebound there as we look in to, you know, certainly for us, our year is both December and January. December obviously with, you know, the number of people homesick there was a little weaker, but we're seeing really strong rebound in January. And we're looking, I think, at a strong year for us in China. Also, as you look at livestock, you know, with opening up China, more return to eating out, to travel, to tourism will not just be good for China, to be honest with you. It could be good for livestock across the globe. So it's one to watch. Obviously, there's huge uncertainty around China, not to mention geopolitical tensions and potential UFOs these days. But, you know, we stand, you know, really confident in where we think China will be for the year, but it remains a big risk both for China as well as for livestock across the board because I think a lot of if China returns, they'll see China buying a lot of pork, poultry, beef, et cetera, from Brazil, Europe, the U.S. there. But, Len, if you want to build anything either on the diagnostic question or China, Whitney.
spk04: No, look, it's great to be here in Denver with a large number of our colleagues on Valentine's Day. But look, I think China, you know, we've been very pleased to see how China ended the year high, high double digit growth on the quarter. My comments around supply was just the timing of recovery, particularly on Revolution, Revolution Plus in that market that might create some dynamics on quarter to quarter. But we are expecting really solid growth out of China this year. I think the first quarter, though, given the timing of the COVID waves, just as a reminder, our international segment closes at the end of November, which means the quarter really started in December for them. And so a lot of that occurred in the first quarter, and we're seeing that having an impact, but we do see a rebound. And as Kristen said, it has implications for other markets in terms of exports into China, but we are expecting a really solid rebound there.
spk12: Our next question comes from Elliot Wilber from Raymond James.
spk03: Thanks. Good morning. I wanted to go back to some of your early commentary around growth expectations for the key DERM franchise and just specifically thinking about the key levers in 2023. Kristen, I wonder if you can maybe just talk about, especially given the high level of penetration of Apoquil in the U.S., what the key levers there are going forward, whether it be price, Um, new market entry, geographic expansion, or just outperformance by Cytopoint relative to Apoquel. And then for Whitney, just, I don't know if you said this in your prepared commentary or not. I didn't catch it if you did, but, um, within gross margin guidance, could you just talk maybe about the inflationary headwinds that are sort of embedded in your guidance for this year? Thanks.
spk08: Sure. I'd say a few things on DERM, both domestically as well as globally. We will be looking to expand, and I think as Whitney said in his prepared remarks, Reaching peak sales in some of these markets, it takes a little bit longer outside of the US. So we're continuing to see very strong growth in dermatology, both in Apoquel and Cytopoint, as well as, you know, life cycle innovation remains really important for us here. The movement to Apoquel Chewable, you know, it's been a real, it's been growing much faster than we expected, and the conversion there remains very, very strong. So I think it's both, you know, you're going to see growth in volume, certainly potentially a little more globally. But beyond Applequel, I mean, I think Cytopoint, you know, vets really love it, and so do customers. It's 100% compliance. So I think if you look at the overall franchise, Applequel, Cytopoint, Applequel, Chewable, we'll probably see greater growth outside the U.S. So we're both looking at volume. You know, we've taken price consistently here, and certainly 2023 will be no different here. So I think you'll see growth from both price And from volume, you'll see chewable really building on it. I think you'll see a real uptick in Cytopoint. Again, we're back to absolute full supply. We, as you know, last year did need to make some trade-off decisions there because it had the same impacts as our other MABs and in some of our vaccines with regard to some of the COVID vaccine supply challenges we had. But we're back full speed. So we're also really investing. Another big growth driver here will be direct-to-consumer advertising. in international. So we are going to do unbranded DTC as we started last year. And we're really, even in the U.S., you still have 6 million itchy dogs that are currently undiagnosed and not treated. So we really continue to see growth here. As we said, double digit, as Whitney mentioned earlier. But I'll let Whitney take the second question, obviously, on inflation in 2023, etc.,
spk04: Yeah, so look, I think across the macro elements, we've been appropriately prudent in how we've laid out this guidance in the range that we've given today. But specifically on gross margins, if you look at inflation, as we're preparing to come into the year, we are certainly accounting for significant inflationary pressure on some of our input costs, energy, Europe, et cetera. But as we've entered the year, I think they're a little bit better than what we anticipated coming into the year, but still significant inflation that's baked into what we have here, which obviously are more than offset by our mix and our price, which is why you see some modest gross margin improvement year on year as we go through the year. But we have factored in fairly significant inflationary pressure in the gross margin figures that we gave.
spk12: And our last question comes from Balashi Prasad from Barclays.
spk11: Hi, this is Michaela on for Balaji. Thanks for taking our questions. Just two from me. I guess, could you first just provide some additional color on business development priorities for the year? And then building upon an earlier question, what are your volume expectations from new pet additions for the year? Thank you.
spk04: So look, when you look at our capital allocation priorities, certainly investing in the business is the first place we go. And clearly, we are poised to significantly invest in the areas of R&D as well as across our supply chain and manufacturing. You saw the significant increase in R&D spend anticipated for 2023 versus 2022, and our CapEx numbers are going to be in the range of $950 million to $1 billion on the year. Certainly, as you look at our strategic priorities, they align with where we look at from a BD perspective in terms of where there might be opportunities to accelerate. Some of those execution on our strategies, and they span across our current slate of businesses, including some of the R and D areas in terms of external innovation and so on. BD is one of those areas, as you know, is hard to predict in terms of exact timing and so on. But it is an important lever that I would say second after investing in the business. And then thirdly, as you saw in 2022, we are returning capital to shareholders to the tune of to $2.2 billion in total between share buybacks and dividends. I think you had a question. Sorry, I think you had a question in terms of new pets. Look, if you look at the growth in the industry over the last two decades, it's been about 5 to 6%. The way I look at it, vet visits, in essence, as you see population growth and so on, it would be reflective in that. They've accounted for about 1% of that growth historically. So, the bigger element of growth here is really fed on his willingness to spend for innovation. And you see that reflected in the spend per visit figures that are far more in terms of the impact on growth historically. And we anticipate that continuing. So, as we sit here today, I wouldn't say new pet increases is a major factor into what we're looking at. It's our innovation and pet owners willingness to pay. And the demographics of pet ownership with Gen Z millennials willing to spend more on pet health and prioritizing those, as well as higher income households that are bringing pets and more pets into their homes. Those are the factors that we watch that contribute to growth.
spk12: It appears we have no further questions at this time. I will now turn the program back over to CEO Kristen Peck.
spk08: Thank you so much, and thanks everybody for your questions and certainly for your continued interest in Zoetis. And just to summarize, we see really positive and sustainable demand for our products based on the fundamental drivers of animal health. We see continued strength across our diverse global portfolio, especially in our products for pet care. And we're continuing to invest in the talent, the pipeline, and the manufacturing capabilities that can support our future growth while adapting our business to the increasingly dynamic environment where we operate. So we look forward to keeping you updated on future calls, and thanks so much for joining us today.
spk12: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
Disclaimer

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