Zoetis Inc.

Welcome to the second quarter 2024 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 the call via dial-in or on the investor relations section of zoetis.com. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your 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 please 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.

Thank you, operator. Good morning, everyone, and welcome to the Zoetis second quarter 2024 earnings call. I am joined today by Kristen Peck, our chief executive officer, and Whitney 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 8-K filing, dated today, Tuesday, August 6th, 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 good morning, everyone. Thank you for joining our second quarter earnings call for 2024. We had another outstanding quarter, growing revenue 11% operationally and 18% operational growth in adjusted net income. Success was fueled by strong demand for innovative products our ability to capture and expand markets, and the dedication of our purpose-driven colleagues. Segment growth was well balanced, with 12% growth in the U.S. and 10% operational revenue growth internationally, even against a strong comparative quarter. Our innovative companion animal portfolio grew 12% operationally, while our livestock portfolio saw 9% operational growth across species and geographies. It's been an excellent first half of 2024, growing revenue 12% operationally, highlighting that our leadership stems from both industry-leading innovation and differentiated execution. We remain focused on our core strategy, delivering consistent results for our customers, the animals in their care, and our shareholders. And our unwavering commitment to excellence has resulted in the most diverse and comprehensive animal health portfolio. We lead the industry in R&D investment, bringing over 300 science-driven innovations to market, including three of the top five best-selling products in animal health, Apoquel, Semperica Trio, and Cytopoint. With our global footprint and world-class manufacturing facilities, we ensure consistent quality and on-time delivery. Our early investments in digital transformation power an exceptional customer experience while positioning us for future growth. We continuously refine our commercial strategies for effective launches and market penetration. And our powerful brand recognition, targeted direct-to-consumer campaigns, experienced sales reps, and medical experts help us capture new market share and win loyalty. Our customers are at the center of everything we do, from understanding their challenges to exceeding their expectations. Scientific innovation enables us to meet their demands while creating new markets. Our commercial execution allows us to defend and grow that market leadership. The animal health industry has proven essential and resilient in all types of climates, but it's also dynamic and growing, and we are well positioned to seize the opportunity. Look no further than our revolutionary osteoarthritis pain franchise, Labrella for dogs and Silencia for cats. We are developing a market with breakthrough products that are safer and more effective while offering convenience for veterinarians and pet owners. The results speak for themselves. Globally, Labrella grew 142% operationally this quarter, fueled by the successful and ongoing US launch. But again, it's innovation coupled with execution. Take Celestia, for example. Despite launching in Europe three years ago, we reported 60% operational growth this quarter. Our breakthroughs are driving increased feline clinic visits, which in turn expands the total market. We, along with veterinarians and pet owners, are excited about how these safe and efficacious products are revolutionizing first-line treatment for chronic pain in doves and cats of all ages. Given our proven track records of building and scaling billion-dollar franchises, We remain confident about the OA pain trajectory, but we don't just launch products, we cultivate them for long-term success. Our key dermatology franchise exemplifies this commitment, delivering strong 18% operational growth. Driven by Apoquel and Apoquel Chewable, along with Cytopoint, we have transformed the management of atopic dermatitis in dogs, providing safe, effective, and convenient solutions. With over 23 million dogs treated globally and a decade of proven results, Apoquil is the world's number one prescribed oral medication for allergic itch. And it is overwhelmingly endorsed by veterinarians worldwide with approximately 90% satisfaction, reflecting the trust and confidence they place in our market leading brands. And we are still unlocking the opportunity. Today, there are approximately 20 million dogs globally with undertreated or untreated pruritic itch, presenting a vast untapped market. Take the U.S., for example. We estimate that 10 million dogs are currently receiving veterinary treatment for itch, while a majority, or roughly 70%, receive Apoquil or Cytopoint. There are 3 million dogs prescribed alternative options like steroids. Moreover, an estimated 8 million dogs are treated with over-the-counter products or are not treated at all. This highlights the potential addressable market of 11 million dogs in the U.S. alone that could benefit from our safe and effective therapies. Internationally, the trend is similar with room for even more growth as dogs become increasingly medicalized, underscoring a significant global market opportunity that will fuel our ongoing growth. To solidify our leadership and win new patients, we are focused on DTC marketing to raise awareness, enhance medical education to improve compliance and expanding retail partnerships. Our ability to execute extends to the Semperica franchise, which grew 22% operationally for the quarter. We have not only navigated the changing competitive landscape, but embraced new opportunities with confidence and agility. Several pre-trends are fueling our growth. First, Pet owner demographics are shifting. They are younger, more affluent, and connected by the powerful human-animal bond. They are highly engaged and willing to invest in their pet's health and well-being. Second, and Whitney will say more on this, there's a significant channel shift aimed at meeting the evolving needs of these younger pet owners. We are making our products more accessible, ensuring they are available where and when they need them. This combination is a crucial part of our growth strategy. And the results are reflected in our performance. In this dynamic environment, our execution across all phases from launch to expansion to defense sets us apart, showcasing we can introduce, sustain, and grow products in a competitive market. Our focus on innovation and execution cuts across every part of the business to create shareholder value. In our livestock portfolio, the sale of our medicated feed additive and certain water-soluble product portfolios remains on track to close in the second half of the year. Meanwhile, we are focusing on innovative solutions for producers, including preventatives, antibiotic alternatives, and genetics. As the demand for healthy and sustainable animal protein continues to rise, we remain committed to supporting our livestock customers. Our dedication to meeting their needs and adapting to the evolving market conditions ensures that we are well positioned to contribute to their success. Building on our outstanding performance this quarter, we remain confident in our ability to grow faster than the market and through competition as reflected in our raised guidance. While macroeconomic headwinds persist, animal health remains resilient and Zoetis' strong operational execution and innovative, diverse and durable portfolio enable us to navigate all kinds of market conditions effectively. We further demonstrated our commitment to shareholders and confidence in our growth trajectory with a recent announcement of a board-approved $6 billion share repurchase program, which Whitney will elaborate on. The animal health landscape is evolving, and our innovations are at the forefront. And while breakthrough innovation is a cornerstone of our strategy, our success is rooted in multiple drivers of growth. We are not just launching new products, we are transforming existing ones to unlock their full potential and better serve customer needs through lifecycle innovations. That means taking proven therapies and developing new formulations, uses, and delivery methods, maximizing their impact and reach. This translates to value created for customers and shareholders alike by allowing us to bring critical new solutions to market faster, minimizing development risks and costs by leveraging existing safety profiles of proven products, and expanding the reach of established products. Our commitment to lifecycle innovation is just one reason we are the leader in animal health. When combined with our market leadership, deep customer insights, strategic investments, and our purpose-driven colleagues, we are uniquely positioned to deliver against the four tenets of our value proposition. To grow revenue faster than the market, to invest in innovation and growth capabilities, to grow adjusted net income faster than revenue, and to return excess capital to shareholders. Our differentiated execution and innovative, diverse, and durable portfolio ensures we are not just keeping pace, we are setting the pace and redefining what's possible in animal health. With that, let me hand it off to Whitney. Whitney.

Thank you, Kristen, and good morning, everyone. As you heard Kristen mention, Our ability to execute on our commercial and strategic plans drove another outstanding quarter. We simultaneously executed across product launches, market expansion, and market defense to propel us to a strong first half. In the second quarter, we posted $2.4 billion in revenue, growing 8% on a reported basis and 11% operationally. Adjusted an income of $711 million, grew 9% on a reported basis, and 18% operation only. Borderly growth was driven by our innovative comparing animal portfolio. Globally, OAPAMADS posted $149 million. Our Semperica franchise posted revenue of $384 million, which includes $299 million from Semperica Trio. And our key dermatology franchise contributed $414 million. Our livestock portfolio also saw strong growth with $694 million in revenue. Looking closer at our success and execution, I'd like to focus first on OA pain. As we continue to execute our US launch strategy, we remain confident in our OA pain trajectory. Based on our experience launching other billion dollar franchises, we know that first in class therapies require significantly more market development than lagging lookalikes. In the US, we have reached over 9,000 vets and veterinary technicians through interactive information sessions with our chief medical officer and industry KOLs. This is on top of the thousands of interactions our sales reps and medical teams have had on individual vet visits. These interactions ensure our customers have the tools and resources to reinforce the safety and efficacy of Librella and Silencia with pet owners. Additionally, we are deploying capital to expand our DTC strategy. Pet owners know their pets better than anyone, and we want to help them detect the signs of OA and the available treatment options. We know these therapies are improving lives based on the positive testimonials from pet owners. The positive impact and reception of Lubella are reflected in the market adoption. In the US, we see record penetration, with over 80% of clinics now purchasing the product. No product in our history has penetrated this quickly. Reorder rates are approaching 90% which is a leading indicator of customer satisfaction. In Europe, Tribbent is expanding to moderate and mild OA cases that were largely untreated, now making up more than 65% of total cases. This is just a glimpse into what we expect in the U.S. over time, as Libella continues to expand the adjustable market and gain market share. Despite our early success, we still have significant room for continued expansion. Our focus on the execution doesn't stop after we launch a product. After more than a decade of exceptional safety and efficacy, our key dermatology franchise is still a critical performance driver, growing 18% operationally in the quarter. In the US, derm clinic visits are increasing, driving volume growth across both Apriquel and Cytopoint. The franchise, including Apriquel, Apriquel Chewable, and Cytopoint, is designed to cover multiple needs across different dermatological indications, and their different methods of administration suit any vet or pet owner preference. Our derm products also address the full spectrum of periodic cases, providing relief from acute and seasonal conditions, as well as treatment for dogs with lifelong chronic conditions, which make up the majority of total derm revenue. And vets and pet owners are extremely happy with the results. In global studies, veterinarians report approximately 90% of their satisfaction with applicable safety and efficacy. Our comprehensive portfolio meets vets' needs and the needs of their patients, and we are confident in our ability to grow revenue even in the face of competition. That confidence is fueled by the significant opportunities for market expansion that Kristen mentioned earlier. We are targeting the 8 million dogs in the US with atopic dermatitis that are either untreated or not treated by a vet through direct-to-consumer advertising, helping to educate pet owners on the signs of an itchy dog and our prescription treatment options. Additionally, in the US, there are 3 million dogs who are prescribed alternative products like steroids. We are confident in our ability to win these new customers through our proven safety and efficacy. We are also drawing more doses from the same patient base due to trends within pet health care, including preference for injectable therapies, chewable formulations, and alternative channel growth, increasing compliance. Lastly, there are many markets where our key dermatology franchise is in the early stages of maturity. These markets should provide long-term growth trajectory, and our outstanding international growth highlights this momentum. Our excellence in execution on our overpayment launches and key dermatology expansion has contributed to a great first half of the year. Now, let's move on to our segment results. U.S. revenue grew 12% in the quarter, with companion animal growing 13% and livestock posting 11% growth. For the first time, sales across our U.S. companion animal portfolio surpassed $1 billion in the quarter. Performance was driven by our Ori Payne MABS, Semperica Trio, and our key dermatology franchise. Portfolio growth was largely driven by trends in detail and home delivery, reflecting the evolution of pet owner preference for convenience and increased compliance on dispensing oral medications. In the clinic, usage of injectable therapeutic treatment is growing to offset the alternative channel shift. Our Oripane, MABS, Librella, and Silencia posted a combined $71 million in U.S. cells in Q2. Librella generated $53 million, primarily on increased clinic utilization. As I mentioned to date, market adoption is higher than any product in our history. Thus, we are confident in our trajectory. Valencia posted $18 million in revenue. We continue to be pleased with what we are seeing in the Freeline OA space. As Kristen mentioned, we see positive trends in Freeline OA visits, which have nearly doubled since our launch almost two years ago. Zamparca TRIO posted U.S. growth of 19% in the quarter on $254 million in revenue. We are entering our second year with competition in the triple combination parasiticide market, and we continue to execute on not just defending our leadership position with TRIO, but growing it. Again, we do not take a launch and done mentality. We posted 26% moving average total growth over the past 12 months, the majority of which was in a competitive market highlighting not only our first mover advantage, but also the stickiness of our customer base. Lastly, in the vet channel, Sampaio Cotrillo is winning with puppies, a leading indicator of future performance. In the absence of meaningful differentiation, vets and pet owners are reluctant to switch from a safe, efficacious product. E-dermatology product sales in the U.S. were $283 million for the quarter, going 17%. Apoquil was the largest growth driver, with Apoquil Truable benefiting from increased conversion. Cytopoint growth continues to be driven by vet and pet owner preference for injectable solutions, especially for chronic cases. Earlier, Kristen alluded to shifting pet owner demographics in the evolving landscape. Much of our success with Sempericatrio and Apoquil has been bolstered by our ability to win in the growing retail and home delivery space. The convenience of these channels for self-administered products are increasingly popular with pet owners, and we are committed to making our products available where our customers need them. Currently, Semperico Trio is the best-selling prescription product in the retail channel, and Apriquel is second. We estimate that over 20% of Trio sales and one-third of Apriquel sales now come via the retail channel. Additionally, The alternative channel growth rate for both Trio and Apoquil exceeded overall growth rate for these products this quarter. Growing pet owner preference for alternative channel convenience has led to a decline in product-only clinic visits. This is why visits are not the best indicator of our performance, given we have consistently grown volume in an evolving landscape. Our US companion animal diagnostics portfolio grew 5% in the quarter, returning to growth after Q1 distributor inventory wore down following our channel strategy's change. U.S. livestock had a strong quarter, going 11%, driven primarily from the timing of supply on septuphyr, which had a soft comparable period last year. Moving on to our international segment, revenue grew 4% on a reported basis and 10%, excluding the impact of foreign exchange. Companion animal grew 12% operationally, and livestock grew 8% operationally. Our international companion animal portfolio growth was driven by our Semperica, key dermatology, and overpaying franchises partially offset by impacts in China. Our international Semperica franchise grew 35% operationally. Growth was driven by Semperica growing 38% operationally to $59 million in sales in the quarter. We continue to see increased use in Latin America, and Eastern Europe, as well as price benefits in high inflationary markets. Semperica Trio grew 31% operationally on $45 million in sales, benefiting from key account growth in Europe, continued focus on DTC, and the positive impact of our recent launch in China. Our key dermatology franchise grew 19% operationally in the quarter, boasting $131 million in sales. we saw double-digit growth across most of our major markets driven by higher compliance and new patients. Growth was partially offset by headwinds in Japan due to pre-priced buy-ins in Q1. As we highlighted earlier, we continue to see significant opportunity for growth. Many international markets are in the early stages of market development with significant runway for growth. Internationally, our OAPI maps grew 35% operationally, costing $79 million in combined revenue. International libellous sales were at $63 million, growing 32% operationally. As we highlighted last quarter, we have lapped the launches in our last significant international markets, which occurred in Q2 of 2023. Valencia sales were at $16 million, growing 49% operationally. Our international companion animal diagnostics portfolio grew 15% operationally, with strong performance across much of Asia and Europe. International companion animal growth was partially offset by expected declines in China, driven by a revolution franchise. International livestock grew 8% operationally in the quarter, driven by price increases primarily in cattle and poultry in high inflationary markets. We saw strong growth in our fish portfolio this quarter, with contributions from price and volume, driven by strong demand for vaccines in Norway. Growth in price in fish was partially offset by volume declines in most of our other livestock species due to our challenging comparable quarter as well as the impact of unfavorable rotations. As expected, the economic challenges in China persist, putting pressure on certain companion animal products as well as livestock, especially swine, consistent with what we have said for several quarters. The impact on our growth is expected to moderate late in the year, but continued headwinds are expected throughout the year across companion animal and livestock. Fiscal discipline across the P&L is one of the things that unlocks successful execution. As we move on to some of the highlights, we wanted to reaffirm our continued commitment to reinvesting in our business and our confidence in the returns we see from those investments. Adjusted gross margins of 71.7% declined 70 basis points on a reported basis. Foreign exchange had an unfavorable impact of 130 basis points. Excluding FX, we saw higher margins due to price increases, favorable mix, and lower freight costs, partially offset by higher manufacturing costs, especially in high inflationary markets. Adjusted operating expenses increased 9% operational Contributing to this growth was SG&A increases of 70% operationally and 17% operational growth in R&D. Improvements in operational growth margin and prudent expense growth contributed to adjusted net income, which grew 18% operationally. Adjusted diluted EPS grew 20% operationally for the quarter. Lastly, I want to highlight our share repurchase program. In the quarter, we repurchased a record high $533 million in shares. Additionally, on August 1st, we announced that we received board approval for the new $6 billion share repurchase program, our largest program to date. The shares are expected to be repurchased over a multi-year period of up to four years, and the program can be canceled at any time. The company's previous $3.5 billion share repurchase program, which was approved in December 2021, is expected to be completed this year. This commitment reflects continued confidence in our ability to return value to shareholders. Before moving to guidance, an update on the planned divestiture of our medicated fit additive portfolio. As Kristen mentioned, we are expecting this divestiture to close sometime in the second half. Our current guidance is not reflective of this sale and may be adjusted subsequent to the close of the deal. As we stated in our April announcement, this portfolio generated approximately $400 million in revenue in 2023 with roughly linear seasonality. Now, moving on to guidance for full year 2024. Our outstanding first half performance, particularly in our Semperica and Key Dermatology franchises, demonstrated our ability to drive growth through execution across our business and gives us confidence going forward. we are raising our 2024 guidance provided during May's earnings call. Please note that guidance reflects foreign exchange rates of late July. For the year, we expect revenue between $9.1 and $9.25 billion, a range of 9% to 11% operational growth. As we stated earlier, our oil and paint trajectory remains on track. Our expectations for Librella for the year remain unchanged. We now expect adjusted net income to be in the range of $2.64 to $2.69 billion, representing operational growth of 13.5% to 15.5%. We are maintaining our commitment to grow adjusted net income faster than revenue over the long term while increasing our investment in demand-generating activities, such as direct-to-consumer advertising. While we saw exceptional leverage this quarter, subsequent quarters may not have the same level of operating leverage due to the optimal timing of investments. Finally, we expected adjusted deluded EPS to be in the range of $5.78 to $5.88, and reported deluded EPS to be in the range of $5.35 to $5.45. In closing, before we go to Q&A, the strength and diversity of our portfolio and our relationships. as well as our ability to execute on our strategic vision, continually allows us to outperform our peers. We have the utmost confidence in our best-in-class portfolio and colleagues to continue to set the benchmark moving forward. Now, I'll hand things over to the operator to open the line for your questions. Operator?

Thank you. And at this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may withdraw your question at any time by pressing star two. Once again, that is star and one for your questions. We will take our first question from John Block with Stiefel. Please go ahead.

Great. Thanks, guys, and good morning. Wetney, maybe the first one for you. Was there a split between price and volume for the quarter? Sorry if I missed that. And then You know, how do we think about pricing contribution from here? We'll call it a 2025 lifecycle innovation, possibly make price somewhat more durable than maybe some people are anticipating. And then the second question, I'll just ask both up front. You know, Kristen, you got a lot of innovation to spend on for the DTC. And so where do the best returns reside? You know, I can make the argument Librello is the least penetrated. But APOCAL and TRIO, arguably the annuity is longer. So maybe you can talk to how you're balancing the spend and the associated returns. Thank you.

Sure, John. I'll take the first part of the question, and then Kristen will address the second one. Look, if you look at the start we've had for the year, it's really been an outstanding start. We've seen demand across our innovative products and clearly a balanced growth picture when you look at the quarter. with the U.S. going 12 percent, international going 10. We saw companion animal growth at 12 percent and livestock 9. To get to your point around price and volume, I will cover the quarter, but then I'll remind you of what the first half of the year looks like and what we're anticipating for the balance of the year. The quarter had about 8 percent price and 3 percent volume. Now, if you look at the price contributions, you have about two points coming in from Argentina, similar to the first quarter and as we anticipated. in the second quarter. And that leaves you with roughly six points of price and three points of volume. Now, I will tell you on a year-to-date basis, given where the comps were versus the prior year, you actually have a very balanced picture between price and volume. On a year-to-date basis, we've grown 12% operationally at the top line. Separating out Argentina, you have 5% price and 5% volume. And that's roughly the balance we expect for the full year. It's just a little bit of nuance on a year-over-year basis based on the comps that's driving much higher volume in Q1 and much higher pricing in Q2. The last point I'll make is TRIO had another outstanding quarter, and we're getting better price realization from more targeted promotions. In fact, we did not run promotions in the second quarter compared to the last year where we did run a promotion. So that has a little bit of dynamic also playing out on the price picture, if you follow that. Again, very pleased with the performance overall. Stronger price contribution coming from that. We expect roughly balanced price volume picture for the year.

Thanks. And, John, I'll take your second question. You know, look, if you saw in a quarter where we grew DERM by 18%, the Sinterra franchise at 22%, and Payne at 142%, clearly the DTC is having a very positive effect in ROI on each of these. We actually think about it in a much more detailed way than what you were mentioning. We don't just look at it by brand. We look at it by channel, so what is connected TV, TV, digital. And there's different ROIs for different. I mean, some of these are building markets, as you said. Some of these are just more consumer-oriented. If you look at parasiticides, consumers really do drive a lot of that spend themselves. versus, you know, Durham and Payne, where you have both the consumer and the vet very involved. So we look at it both by product. We look at it seasonality. And I'd say we're investing, you know, significantly across all three, where we really believe both there's an opportunity to drive compliance and as well as opportunities to grow these markets. So we're aggressively investing across each, but we look at it in a very detailed level to make sure the ROI of any given channel we're investing at any given time of the year makes the most sense.

Thank you. We'll take our next question from Erin Wright with Morgan Stanley. Please go ahead.

Great. Thanks for taking my questions. On Librella first, so should we continue to see that sequential ramp in U.S. Librella sales throughout the remainder of the year? And how are reorder rates, sellout trends kind of throughout the quarter? How did that progress relative to your expectations and thoughts on potential label changes there as well for Librella? And then my second question is on just the competitive positioning now. I guess, can you speak to how you're thinking about that now, particularly in the dermatology category, but also in parasiticides, and how much of the guidance update today was attributable to your view of your competitive positioning for the balance of the year? Thanks.

Thanks. I'll take the first question. I'll let Whitney take the second question on competition across all three. You know, obviously very, very pleased with Lobrello's growth in the quarter at 142%. What we're really seeing is it's fundamentally improving the quality of life for dogs with OA pain. We've seen a really positive reception. You know, they find it safe and efficacious, and it's really making a real difference. To date, we have about 18 million doses. We're very pleased with the penetration to date in the U.S., which is 80%. with the reorder rate at 86%. So to your point on quarter-over-quarter growth, continuing to see and expect through the rest of the year to see significant quarter-over-quarter growth in this product. You know, as we mentioned on the last call, we are always in ongoing discussions with the FDA, certainly in the first year after launch, as they're doing their post-marketing reviews. We have been in those. We have had dialogue with them about possible changes to the Rubella label, as we've had in many of the other markets we've operated in You know, in those markets, as you look at it, we continue to see positive trends quarter over quarter in Europe after label changes we had in both the EU and the UK in both 2022 and 2023. So, you know, these are label changes, as you know, are not uncommon, as we talked about last quarter. So, you know, we're really excited to see the growth we continue to see in Labrella and really the excitement and positive stories from pet owners. So, Whitney, you want to take the second question?

Sure. Look, when we look at the performance so far, it's been phenomenal across DERM, and TRIO for the first half of the year, as well as strong contributions, obviously, coming from our OAPain franchise. You heard the numbers coming in from Librella and Silencia, both in the U.S. with the launch as well as internationally. When we think about the competitive landscape, look, clearly, given what we're seeing and what we anticipate continuing to the momentum in the business, we're raising guidance based on the core business. I would say DERM, in particular, when we look at the competitive landscape, we've raised our expectations on DERM to double digits. We were saying high single digits previously. When we look at TRIO, the update isn't really meaningful. We were anticipating this would be a late-in-the-year competitive launch anyway. It's the third to come to market, et cetera, so not any meaningful impact here in terms of how we think about the guidance.

Thank you. We'll take our next question from Michael Ricekin with Bank of America. Please go ahead.

All right, thanks. Both of my questions are going to be on DERM markets. First, just a quick one on Apoquil Chewable. You launched that recently, and there was a lot of excitement around that. I was just wondering if you could provide any color on how meaningful a contribution that's having to the better results you're seeing, or if you think it's more traditional Apoquil that's still driving DERM. And, you know, are there any inventory dynamics there? We should be mindful. Was there any stocking with distributors in the quarter or year-to-date? Just an update on Apoquil Chillable. And then the follow-up on sort of the long-term opportunity. I think you gave a lot of color in the slides on the opportunity in Durham in terms of the under-penetrated market, the untreated opportunity, and steps you're taking to further improve penetrate that. My question is, that's been the case for a number of years and you've had a Durham product on the market for over a decade now. So it seems like there is a sizable part of the market that's just resistant to treatment or possibly isn't going to the clinic, isn't amenable to this product. I'm just wondering how real do you think that opportunity is and what the barrier there is? Is that an education? Is that a cost price point? Is that a treatment modality issue, just why is there still such a sizable unaddressed market in Durham and what steps you can do to further penetrate that? Thanks.

Thanks, Mike. I'll take the second question on the long-term opportunity, and then I'll let Whitney cover anything that I missed as well as cover all the dynamics you were asking for specifically around chewable. To your point, you know, our Durham portfolio has been on the market for 11 years, and we posted 18% growth in the quarter. So I would say that there's a significant opportunity to continue to expand the market. I appreciate your comment on the slide. We did try to add slides this quarter to try to bring to light some of the stories that we're talking about. Again, get some of those numbers out there for you. And specifically what we were trying to address in that is the significant opportunity where we see two drivers really of the future growth. One is around compliance, and we're seeing really strong growth here around compliance. You know, we can increase compliance through retail and auto shift. I even think Chewable, which Wetney will talk about, will help drive compliance. So we think there's a significant opportunity for more weeks and more months on therapy. And, you know, I also think there's a big opportunity to continue to expand the market. And, you know, building on what Wetney said in his prepared remarks, you know, there's 3 million dog owners right now that are prescribed other products, such as steroids, that could be moved to our products. And then there's 8 million dogs with OA who might be using shampoos or things like that or over-the-counter treatments, you know, or might not be using anything at all. We see those as significant opportunities to continue to grow the market. That's 11 million dogs in the U.S. alone. And as I mentioned in my remarks, internationally we see the same key drivers and same opportunities, but with an additional one, which is that there's still many dogs yet to be medicalized and international. And as those dogs become more medicalized, across many countries in China, Brazil, et cetera, we see a significant opportunity there. But I knew you asked a number of questions on chewable, which let me build on it, as well as anything else you saw in Durham you wanted to mention.

Well, when I look at the Durham picture, Mike, I'm very excited about how we are thoughtfully targeting these subparts of the business beyond continuing to educate pet owners and so on, which is already benefiting us in terms of the growth we continue to see in this product 11 years later. So clearly, we are penetrating those areas, and we think there are some real ways we can smartly and thoughtfully targets. Here, above the about 7 million that we are already treating with our products, there's 11 million that we can go after here in the U.S. alone, and Kristin just touched on that. And so, we won't go into more detail on that, but we're very excited about how we're doing that there. In terms of true, look, this is largely conversion from APRICOL, so I wouldn't say that it is necessarily contributing to overall growth, but an important part of our strategy as we look ahead. We've seen the conversion rates outside the U.S., for example, in those markets in Europe we've been in for, I think, about two and a half or so years now. Those are now about 50% penetration. In the U.S., as we ended the quarter, we're approaching about a quarter conversion. I think we've crossed that since. So we're in that ballpark. So clearly, meaningfully converting from Apoquil, which, again, is an important part of our business and we think could long-term contribute to overall growth given the ease of use and preference to pet owners, et cetera.

Thank you. We'll take our next question from Brandon Vasquez with William Blair. Please go ahead.

Hey, everyone. Thanks for taking the question. Maybe on my first question, can you just walk a little bit through the increased guidance, maybe on the top line and the bottom line, specifically what is being passed through there? I think, not to pick on it, it was a great quarter. I think you beat a little bit more, especially on the organic growth relative to our estimates, and I think less than that beat was passed through. So just curious if there's puts and takes through the rest of the year that we should be keeping in mind for both sales and EPS on the bottom line?

Sure. Look, first of all, let me just cover one last piece that I didn't cover on the last call, which was the contributions in terms of stocking around CHU. And then I will get Brandon to your question around the guidance and what went into it in terms of puts and takes and top versus bottom. First of all, there's very little contribution in terms of net inventory into distribution on True, it's about $4 million, so call it one percentage point out of the 18 we talked about on Key Derm globally, so not meaningful at all. Now, to your point around the guidance, look, we raised the midpoint of our guidance about 50 basis points, the same on the bottom. We are still very much committed and confident in driving operational sort of growth and expansion through the P&L. You're seeing about a 450 basis points separation between top line and bottom line. continue to demonstrate our core value proposition to grow the bottom line faster than the top line. I think what you're seeing here in terms of the guide, why it's the same raise at top and bottom in terms of basis points is because we see an opportunity to invest in the business in areas that will drive growth as we exit the year and enter into next year. And as we've said continuously, we will make those investments as we see those opportunities, but still, again, sticking to our commitment to driving top and bottom. I think as you look at the back half of the year, I will note a couple of things. If you remember last year in the fourth quarter, we have basically an easier comp, particularly on just the bottom line in the fourth quarter. But these investments will impact the operational leverage you'll see in the third quarter. So expect that to be not at the levels that you're seeing in Q2 here as you map from the guidance and the implications in the back half. So clearly the back half looks like about a 9% top line growth. there at the top, leverage on the back half, but more heavily weighted towards Q4 versus Q3 in terms of that leverage.

Okay, we'll take our next question from Steve Scala with TD Cohen. Please go ahead.

Hi, this is Chris. I'm with Steve Scala. Thanks for taking our questions. We had just one on dermatology. Can you provide any color on the breakdown of key germ cells between Apoquel, Apoquel-truable, and Cytopoint? How do you see this split evolving over time, and does Apricult Chewable provide extended patent protection for the brand? Thank you.

Sure. I'll cover both here. Look, really, when you look at the conversion strategy we have with Apricult Chewable versus Applequill, we talk about the Keyderm franchise here versus breaking them out here. So we have 18% growth in Keyderm. if you look at both the Apriquel franchise as well as CiderPoint with double-digit growth in the quarter. Again, we continue to emphasize the combination of Apriquel and Apriquel Trueable versus breaking them out, which is the reason that you heard the commentary from us as you did. In terms of patent protection, look, there are various patents that cover the product both across the active ingredient as well as the formulation and dosing regimen, so they do vary. But overall, if you look at the franchise, we're looking at Patents that extend out to 2031. More details are available in the 10K if you want to pull that up from last year. And of course, this year's 10K as well will cover that.

Okay, we'll take our next question from Balaji Prasad with Barclays. Please go ahead.

Hi, good morning and congratulations on the quarter. Just a couple for me. Firstly, I want to dig a bit into the nuances of pricing. Is there a difference in how pet owners pursue price hikes for pharmaceutical products versus diagnostics? The reason I'm asking is our veterinary survey consistently showing that pet owners are increasingly concerned about spending trends in diagnostics. It seems that this is not applicable on the pharmaceutical side. Would love your take on it, Juan. Two, could you also just size the fish vaccine business a bit, the growth, and in that context, what would an approval like AlphaJet Micro translate to in terms of accelerating this revenue growth? Thank you.

So, look, maybe I'll take a stab at the first one, Balaji. Look, I think you've seen that spend in animal health, particular pet owners, is a doable spend, and they see their pet health as essential. We've seen that time and time again, and every survey we've done given the human-animal bond, et cetera, shows that. I think when you look at pet health spend, 86% of pet owners are saying that they would spend whatever it takes if their pet needed extensive veterinary care. We've done market studies as well that demonstrate if pet owners had a 20% reduction in their budget, they would still spend the same on their pet health. So clearly underscoring this importance in terms of the importance of the pet health as a member of the family of pet owners, and we see that show up in terms of our numbers. I don't know if I have, you know, a view in terms of how that differentiates between, you know, therapeutics versus diagnostics. Clearly, as we look at the picture today, you can see strong volume growth in our business, even as you see very robust price as well. So clearly, we see that opportunity to continue to drive the business. That way, we are seeing some price utilization. So it's not price to the pet owners, price into our channels, into the vet clinics, etc., But you see our ability to continue to take price and still drive volume in the business, given the innovative solutions we're bringing that are addressing chronic conditions for pet owners that they really, really care about. So we think that there's continued room to continue to do that. In terms of the phish vaccine, I can't speak to the specific vaccine you talked about. Clearly, we saw 20% growth in our phish portfolio this quarter. This is largely driven by demand for vaccines in Norway. Very important market for us, so we've seen both price And volume there perhaps we'll take offline that specific one that you referenced.

Thank you. We'll take our next question from David Westenberg with Piper Sandler. Please go ahead.

Hi. Thank you for taking my question and congrats on a great quarter here. So you definitely have products that drive visits in and themselves like Cytopoint and uh, Librella, but you also do have wellness dependent, um, products such as vaccines. And maybe I'd argue pro heart heart is in that category. Um, can you talk about how those wellness product, uh, products have been performing your expectation, uh, for how they do the rest of the year? And, um, can you help frame the size of, of that, those kinds of products in your portfolio? And then if I get to squeeze in one smaller one, uh, were there any portfolio Bennett sales, with your MFA portfolio that you're getting rid of and why is that portfolio, if there isn't, more or less portfolio sales dependent? Thank you.

Sure. I'll take your MFA question and then I'll let Whitney take the volumes and things like that across wellness and vaccines. As you think about our medicated feed additive business, as you saw, you know, it was integrated into some of our portfolio contracts, but the majority of those contracts, the majority of the value is what me, you know, outlined, you know, globally, our MFA sales last year in 2023 were only 400 million. So, you know, it's not inconsequential, but it is not a material way of the way we negotiate. Most of our negotiations across portfolio are in more innovative products that are essential to our customers. So, no, we are not concerned in livestock as we sell that business. and our ability to continue to leverage our portfolio to provide the best value for our customers. So we're committed to continuing to do that. And I'll let Whitney take the second question sort of on the wellness.

Look, David, I think, you know, your question on wellness in terms of what's happening across the core portfolio brands versus the rest, I think at the heart of that question is really what's happening around visits, which we have continuously talked about that overall visits are not a good indicator for our business. And you see volume growth across our pet care business each quarter, even when overall visits are down. Now, to get to your point, if you look at Apple Quill, SidePoint, the Kid Derm franchise, if you look at Trio and Semperica franchise and OA Payne, those are all seeing increased volume across the business. I think if you then say what's happened to the rest of the portfolio, it contributed about two percentage points to our growth. And that's largely the price in this quarter, but that's just a dynamic versus the prior year in terms of both timing of when we had some vaccine availability in the prior year that added to supply last year, and therefore it's a comp item, if you will. And then China has its impact in terms of what do you put the rest of the portfolio. So it's a little bit more price versus volume in the quarter. But overall, typically we see about one or two point contribution to growth from the rest of the portfolio. And that's what we're seeing this year. Again, I would underscore that we are seeing increased volumes across pet care, regardless of the overall visit picture. And I think that's really what's important for us to win with our business.

We'll take our next question from Glenn Santangelo with Jeff Rees. Please go ahead.

Oh, yeah. Thanks for taking my question. I maybe want to touch on some of the topics that we just talked about. But, you know, we get a lot of questions from investors talking about these sluggish sort of pet ownership and vet visit trends and, you know, taking all that into the context of a weakening consumer here. And Whitney, I heard your comments regarding, you know, how you view the consumer and your comments regarding how strong the retail channel has been for you all. But, you know, could you maybe help us reconcile some of those trends and data points as you think about, you know, taking the steps to raise guidance in the back half of the year? I mean, you know, how conservative, you know, are you with respect to the consumer and how you think about those trends in general? Thanks.

Thanks. I'll start and let's see if Whitney wants to build anything here. I think what you're seeing is the, you know, you might see an impact in lower spending and pet discretionary, but, you know, we're continuing to see consumer receive pet medical care as very essential and they are willing to spend. So if you look in the quarter, we saw about a 4% growth of revenue in the clinics. About 6.2 revenue per visit growth. I mean, obviously, you're referencing the decline in overall clinic visits. But if you look at our, you know, US pet care numbers, we outpaced significantly, you know, overall, you know, in the US with 13% growth in our companion animal business. So we're seeing very strong demand for our products. These pet owners are young, they're affluent, they see the pets as a central member of their family, and they are continuing to spend to keep their pets healthy and happy. So we are very optimistic as we look to the rest of this year and confident in the guidance that Wetne provided, and confident, honestly, as we look into 2025. that the consumer, when it comes to essential veterinary care, you know, still is willing to spend. We've done multiple studies, as we've referenced before. You know, 86% of pet owners would spend, quote, whatever it takes to take care of their pet. And even when faced with a 20% reduction in their income, they would not change what they spend to take care of their pets.

Thank you. We'll take our next question from Chris Schott with J.P. Morgan. Please go ahead.

Great. Thanks so much. Just two questions for me. On Derm, is there an updated view on growth for that business in 2024 relative to the comments you made in 1Q, just in light of the very strong first half results you've had? And maybe just a second part to the Derm question, with your competitor announcing that their product may have a black box warning, does that change your approach in terms of how you think you might either growing or defending the Derm franchise, promotions, marketing, et cetera, as you go through not just the second half of this year, about to 2025, or are the plans largely unchanged in light of that update? Thank you.

Sure, Chris. Thanks for the question. Look, if we look at the growth I mentioned earlier on the call, given the competitive dynamics and, quite frankly, just the strength of our growth as we continue to expand the market, 18% growth in the second quarter, we are raising our expectations for Keep Durham franchise. We said last quarter would be high single digits. We're now saying it's double digit growth for 2025. Look, on your question, I'll start on the black box warning and turn it over to Kristen to add any additional points. Clearly, a black box warning is the most serious warning that the FDA will have on a product. And when faced against a product that does not have one, also has been in the market for 11 years, over $23 million have been treated with our apricot product, the satisfaction levels being above 90% or around 90%, both on safety and efficacy, that becomes a total order. So clearly, we talked about our excitement, quite frankly, around still unmet need out there in terms of undertreated and untreated that we are targeting regardless of competition, because we believe on offense here in terms of growing expanding use of our products is the best move regardless of the competition, but clearly we'll position as well versus a product that has a black box label.

Yeah, and the only thing I'd add there is I think what's really exciting about Apoquil is that you don't have to trade off safety and efficacy there. It can be used across all durations of therapy, both acute, seasonal, and chronic You know, I think the chewable really provides differentiation, especially at the consumer level. You don't have to worry about vaccine status, and it works very, very quickly. So I think that's what also gives us optimism and our potential to continue to grow this franchise.

Thank you. We'll take our next question from Navan Tai with BNP Paravis. Please go ahead.

Hi, good morning. Thanks for taking my question. Just had one on Librella, if you had any updated thoughts on the transition to the moderate population, as well as the antitrust investigation in Europe. And then second on vet visits, and I know that you are not as sensitive as other players, but if you have any outlook for vet visits for the four-year next year. Thank you.

Sure. First, on your question on the EU Commission investigation, it actually has to do with an experimental compound that was part of the NECVET acquisition, which was about seven years ago. We continue to believe our decision to stop the experimental compound was sound, rigorous, and lawful, and we're confident the concerns will be unfounded when they finish their investigation with regards to that. You were asking me how we're doing in international with regards to La Brella. Right now, about 65% of the cases are now mild to moderate, which we think is significant progress. This has been a big focus of ours, as we've mentioned on previous calls. And with regards to your last point, I think on vet visits, we don't really have really good detailed information internationally on vet visits. So there's not great information. It ranges by market to market. There's not great sources. So I don't have any specifics I can share there.

Thank you. We'll take our next question from Thomas Devorti with Nefron Research. Please go ahead.

Hello. Thanks for taking the question. Just, I guess, livestock, I know maybe not a topic asked a lot, but even excluding fish, your cattle poultry swine growth was pretty strong in the quarter. And I was just wondering, you know, the last couple of years have been difficult for livestock market with inflation and other pressures just you know whether you see maybe a more sustainable maybe bid or high school digit growth in that market i don't kind of there's mfa is going get it out there but uh but just otherwise whether the market maybe is improving yeah so great uh if you look at the quarter we saw nine percent growth uh in our livestock uh portfolio uh as you've said uh continuously livestock tends to grow the markets

somewhere between 2% and 4%. Typically, this year we are seeing increased price, particularly in those hyperinflationary markets like Argentina, for example. And so we would expect livestock as a market to grow towards the higher end of that range. And we believe we will follow that range as well if you look at what we would expect in our results. I think when you see high single-digit growth rates like this, sometimes it's a comp. For example, in the U.S., SEPTAFIR had an easier conference this prior year, so you'll see an uptick in that. But overall, we expect livestock to be in that two to four range, perhaps a touch above that in this current environment, given the pricing environment on those hyperinflationary markets.

And there are no further questions at this time. I'll turn the call back to the speakers for any closing remarks.

Thank you. Thanks everybody for joining the call today and for your questions. Our ability to seamlessly integrate innovation and execution resulted in what I believe is an outstanding second quarter and first half of 2024. It led us to raise our guidance and we are very excited about the continued momentum for the rest of the year. I think what we clearly demonstrated is our ability to generate groundbreaking ideas and translate those into tangible results. We are laser focused on our strategy to ensure we remain at the forefront of the industry. I believe our diverse and durable portfolio of trusted and best-in-class products positions as well to capitalize on the emerging opportunities and to really redefine how animals are cared for for the long term. And finally, I want to express my heartfelt gratitude to all of our dedicated colleagues across the globe. We recently celebrated Purpose Month across our teams and geographies, highlighting how we bring our purpose to life every day with our customers, our communities, and each other. And their passion for nurturing the world and humankind by advancing care for animals is truly inspiring. Your hard work and commitment are the driving force behind our success. And I want to thank you for everything that you do. And I want to thank all of you for joining us today. Have a great day.

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.