Zoetis Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2022

There are 14 speakers on the call.

Operator

Welcome to the Third Quarter 2022 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately 2 hours after the conclusion of this call via dial in or on the Investor Relations section of zoetis.com.

Operator

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. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Zoetis Q3 2022 earnings call. I am joined today by Kristin 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 ks and our reports on Form 10 Q.

Speaker 1

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.

Speaker 1

GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8 ks filing dated today, Thursday, November 3, 2022. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Speaker 2

Thank you, Steve, and welcome everyone to our Q3 earnings call for 2022. While the world faces a dynamic external environment and uncertainty in the global economy. Our business has been tested and continues to perform well based on our diverse durable portfolio and global footprint. In the Q3, we delivered solid results with 5% operational revenue growth, reflecting steady performance across our innovation driven companion animal portfolio, especially in our international markets. Our international business grew 8% operationally and the U.

Speaker 2

S. Grew 2% in the quarter. As we've been saying for some time, supply challenges throughout the year remain a headwind to meeting global demand and those impacts were more pronounced in the Q3. Supply has been improving in certain product categories such as parasiticides, and we continue prioritizing supply for key products and markets. However, we do expect constraints in some categories to continue.

Speaker 2

Overall, positive pet care trends in terms of increasing spend and pet owner demographics continue to underpin the strength of our business. With 10% operational growth in Companion Animal Products in the Q3, we continue to see strong demand globally for Simparica Trio and other parasiticides our key dermatology products Apoquel and Cytopoint small animal vaccines and monoclonal antibodies, Librela and ZOLENSCIA. In the U. S, supply constraints for companion animal products tempered some of our expected growth in the quarter and we also experienced an impact related to workforce challenges in veterinary clinics. The decline in clinic visits is stabilizing at pre COVID rates as clinics struggle with capacity issues.

Speaker 2

That being said, Average revenues per visit continue to rise in the U. S. As pet owners place a premium on the care of their pets, a positive long term trend. This commitment to pet well-being is also demonstrated in the success of our monoclonal antibodies for osteoarthritis pain, Librela and Valencia. They are performing exceptionally well in the EU And ZOLENSI is on track after being launched in the U.

Speaker 2

S. At the end of the Q3. We are investing in building a feline market for pain treatment and Undertreated Conditions for Cats. Outside of the U. S, Companion Animal Products showed strong growth of 17% operationally.

Speaker 2

In some of our largest markets like China and Australia, we're seeing our innovative pet care products contributing more and more to growth in these traditionally livestock driven markets. Meanwhile, our global livestock business performed largely as expected in the 3rd quarter with a decline of 3% operationally. We continue to face generic competition for livestock products, especially in cattle and poultry and we face supply constraints in products such as vaccines. However, we are seeing solid pockets of growth, especially in aquaculture and poultry products and certain markets outside the U. S.

Speaker 2

As we stabilize from the generic competition and resume more consistent supply, we will improve our livestock performance. Looking ahead, We remain confident in the innovation driven strength of our business, especially in areas such as parasiticides, key dermatology products, vaccines and monoclonal antibodies. I am optimistic about the fundamental growth drivers and essential nature of the animal health industry to weather challenging times. However, we are revising our full year guidance to affect lower than expected sales in the second half of the year due to supply constraints, veterinary workforce challenges and recent changes to foreign exchange rates. We believe it is prudent to take a more cautious view given the increasing uncertainty around supply, inflation and other macroeconomic conditions that have become less predictable.

Speaker 2

As we look ahead to our 10th anniversary as an independent company next year And I reflect on all that we've achieved in the last decade. I feel very positive about where we are and the capabilities we have to overcome any challenges we face. Historically, we've always been able to adapt our business to meet evolving customer needs, drive growth faster than the market and achieve our purpose in nurturing the world and humankind by advancing care for animals. The human animal bond and people's connection to pets and farm animals is powerful. It's a bond we support with a diverse portfolio that remains the strength of our business.

Speaker 2

And we see strong global demand for innovative products, especially in companion animal parasiticides, Dermatology, vaccines, diagnostics and monoclonal antibodies for pain. Positive pet owner demographics and their willingness to spend on the care of their animals remain long term sustainable drivers of growth, despite some of the workforce challenges in clinics. And Livestock continues to be an important part of our business, an area where we drive significant value for our customers and shareholders. To sustain our growth, innovation remains our lifeblood and we continue investing in the industry's leading R and D engine at Zoetis. Our monoclonal antibody portfolio for OA pain is a game changer.

Speaker 2

It has been performing exceptionally well as a pet treatment and growth driver in an increasing number of markets and LibreLA is expected to be a blockbuster for Zoetis in 2022. In terms of the U. S. Approval for Librella, we have confirmed dates for the FDA site inspections outside the U. S, but their timing makes it unlikely to have an approval this year.

Speaker 2

Given our ongoing conversations with the FDA, we are confident in receiving approval in the first half 2023 with the launch planned for late in the year. In closing, our business continues to perform well in a dynamic market and we are well positioned to advance our strategic growth opportunities in parasiticides, dermatology, pain, diagnostics and emerging markets. Even as we face challenging supply constraints, generic competition and macroeconomic uncertainty, I remain confident in the resilience of our business and colleagues as we finish 2022 and we go into 2023. Given the importance of the companionship and nutrition provided by Pets and Farm Animals and the power of the human animal bond. The animal health industry has consistently grown in the mid single digits even in down markets.

Speaker 2

And as the leader in animal health, we have the pipeline, market leadership positions, Global scale and financial strength to continue outpacing the market. Throughout the last 10 years in various market conditions, We have grown the top line an average of about 8% and even in the last recession when our business was more livestock than companion animal, We still grew. As we look toward the end of the year and into 2023, I expect us to continue setting the bar on innovation, cultivating a high performing culture and delivering superior customer experiences. All of this will have us growing significantly above the market and building enduring value for shareholders in this dynamic market. Thank you.

Speaker 2

Now, let me hand things over to Whitney.

Speaker 3

Thank you, Kristen, and good morning, everyone. As Kristen mentioned, we had a solid quarter with growth across a number of our core franchises, driven by our companion animal performance, especially in international. Today, I will focus my comments on our Q3 financial results, the key drivers contributing to our performance and provide an update on our full year 2022 guidance. In the 3rd quarter, We generated revenue of $2,000,000,000 growing 1% on a reported basis and 5% on an operational basis. Adjusted net income of $566,000,000 declined 5% on a reported basis and grew 2% on an operational basis.

Speaker 3

Of the 5% operational revenue growth, 4% is from volume and 1% from price. Volume growth consisted of 4% from new products, which includes Simparica Trio and all myelin polyantibodies for osteoarthritis pain in dogs and cats, Libell and Cylencia and 1% from key dermatology products, while other in line products declined 1%. The decline was largely the result of supply challenges. Companion Animal Products continues to be the primary driver of growth, growing 10% operationally, with livestock declining 3% on an operational basis in the quarter. Simparica Trio was the largest contributor to growth in the quarter.

Speaker 3

Trio posted global revenue of $172,000,000 representing operational growth of 43% versus the comparable period in 2021. We expect to continue to grow the addressable market for flea, tick and heartworm globally Significant room for growth with brands like Simparica Trio, Simparica, Core Heart and Revolution Plus. Meanwhile, our key dermatology products, Apoquel and Cytopoint, had solid global growth, especially internationally, with $343,000,000 of revenue, representing 11% operational growth against a robust prior year in which these products grew 26% operationally. Year to date revenue is $966,000,000 representing 18% operational growth. Sales of our monoclonal antibodies for osteoarthritis pain in dogs and cats in international continue to exceed expectations, posting $37,000,000 of sales in the quarter.

Speaker 3

Shifting to diagnostics, our global companion animal diagnostics portfolio recorded $78,000,000 in revenue in Q3, declining 9% operationally. Despite declining revenues, we saw solid new instrument placements in the quarter. The decline in our U. S. Diagnostics portfolio was partially offset by growth internationally in the quarter.

Speaker 3

In the U. S, our diagnostics results were also impacted by the vet clinic workforce challenges We continue to experience a slowdown in sales as we transition to our new go to market model and build out a sizable and new dedicated field force for diagnostics. While disruptive in the short term, this investment is putting the necessary elements in place to position and grow our Diagnostics portfolio over the long run. We expect the effectiveness of our new diagnostics field force to improve gradually into 2023. Diagnostics remains core to our business and a key long term growth driver for Zoetis.

Speaker 3

Meanwhile, Sales of livestock products declined by 3% operationally in the quarter. Our portfolio continues to be challenged by generics and shipper alternatives with Jackson in cattle as well as Zoetis in poultry and supply challenges for certain products. Our fish portfolio grew 19% operational in the quarter And along with the strength of our sheet products in Australia, partially offset the broader decline. Now moving on to revenue growth by segment for the quarter. U.

Speaker 3

S. Revenue was $1,100,000,000 in the quarter, growing 2% with companion animal sales growing 6% and livestock sales declining by 7%. Focusing first on companion animal, the effects of our ongoing supply challenges were more pronounced in the 3rd quarter, tempering growth in our parasiticides. In U. S.

Speaker 3

Companion animal, we are also seeing vet Clinic workforce challenges limiting appointment availability as visits declined 4% in the quarter. Despite lower visits, Practice revenue is growing approximately 5% as spending per visit remains strong again this quarter, increasing more than 9%. The decline in clinic visits is stabilizing at pre COVID levels as the impact of higher pet ownership growth rates due to COVID normalize and vet practices deal with workforce challenges. However, underlying demand for veterinary care remains robust throughout the country even as people return to work. While vet clinic workforce challenges do exist, we believe vet clinic revenue will continue to grow at levels above what we were seeing prior to COVID as the standard of veterinary care continues to increase through innovation, better pet ownership demographics, higher compliance and more pets.

Speaker 3

Given with the robust comparative year, we continue to see volume growth in our companion animal products driven by our innovative products such as Trio and our key dermatology products, Apoquel and Cytopoint. Growth of Simparacotrula was again strong in the quarter with sales of $157,000,000 in the U. S. Growing 43%. Despite the impact of supply constraints and the vet claim workforce challenges, we continue to take share within individual clinics.

Speaker 3

These dynamics will provide additional runway for future expansion of both the broader market and revenue growth for Trio. Key dermatology product sales in the U. S. Were $231,000,000 for the quarter, growing 6% with Apoquel and Cytopoint each contributing to growth. Year to date, our U.

Speaker 3

S. Derm portfolio has grown 12%. Growth is tempered by prior year COVID related spikes In derm visits, they drove visit growth of 25% in Q3 2021 and helped accelerate market expansion. This growth was also impacted by the ongoing vet clinic workforce challenges. We expect continued expansion of the market for the foreseeable future.

Speaker 3

U. S. Livestock declined 7% in the quarter as expected with sales of cattle products impacted by generic competition for Jackson. Meanwhile, our U. S.

Speaker 3

Poaching portfolio continues to be negatively impacted by the extended use of lower cost alternatives and generic competition for Zoetis. U. S. Swine product sales declined 3% in the quarter, driven primarily by increased competition for vaccines. Moving on to our International segment, where revenue declined 2% on a reported basis and grew 8% operationally in the quarter.

Speaker 3

International companion animal revenue grew 17% operationally and livestock revenue was flat operationally. Increased sales of companion animal products resulted from growth of monoclonal antibodies, full aviation of osteoarthritis pain, archidermythology products and SIPEREICA Trio. We remain excited with the long term prospects of these innovative brands and expect future direct to consumer advertising to help drive additional growth. Sales of companion animal vaccines also contributed to growth in the quarter. We continue to be pleased with the performance of our monoclonal antibodies for OA pain, with Librello generating $31,000,000 and CELINCIA delivering $6,000,000 in 3rd quarter sales.

Speaker 3

Librell remains on track to exceed $100,000,000 in revenue this year, a new blockbuster for Zoetis. As we have mentioned in prior quarters, Libuel is the number one paying product in the EU with the underlying performance metrics being very favorable for future growth. Reordering rates remain high. Compliance continues to exceed our initial expectations and we continue to see significant opportunity to expand the pain market with a meaningful percentage of dogs on Librella being new to the market. We saw volume growth in our international companion animal portfolio in the 3rd quarter And we also saw growth across our injectable products, including monoclonal antibodies and vaccines.

Speaker 3

Meanwhile, international livestock was flat operational in the quarter. Our fish portfolio grew 19% operationally and experienced increased demand for vaccines in key salmon markets, including Norway and Chile. Sales of ship products grew as a result of favorable market conditions and new product launches in Australia. Growth was offset by swine sales, which declined due to supply constraints across international and lower sales across Europe due to reduced exports to China and higher input costs for producers. Sales in Brazil also declined as we are seeing Supply challenges on cattle products.

Speaker 3

Additionally, inflationary impacts on consumer spending are driving consumption away from beef to lower cost animal proteins, such as pork and chicken and reducing Reducer Profitability. Lastly, the Jurex acquisition, which is based in Australia, was completed on September 30 and is not reflected in our Q3 results. Now moving on to the rest of the P and L for the quarter. Adjusted gross margins of 69.8% decreased 90 basis points on a comparable basis to the prior year, resulting primarily from unfavorable foreign exchange impacts. Operationally, gross margin slightly declined, driven by higher manufacturing, freight and other costs, which were largely offset by favorable mix and price.

Speaker 3

Adjusted operating expenses increased 3% operationally, with SG and A growth of 3% operationally, driven by T and E costs beginning to return to pre COVID levels, as well as freight and logistics. R and D expenses increased 4% operationally due to higher compensation costs and higher operating costs. The adjusted effective tax rate for the quarter was 20.9 percent, an increase of 4 20 basis points due to unfavorable changes to the jurisdictional mix of earnings, including decreased favorability related to foreign derived intangible income in the prior year period. And finally, Adjusted net income grew 2% operationally and adjusted diluted EPS grew 4% operationally for the quarter. Capital expenditures in the Q3 were $154,000,000 In the quarter, we repurchased approximately $375,000,000 of Zoetis shares We returned over $500,000,000 to shareholders through a combination of share repurchases and dividends.

Speaker 3

Year to date, we have repurchased almost $1,200,000,000 of Zoetis shares. Now moving on to our updated guidance for the full year 2022. For operational revenue growth, we are lowering our growth to 7% to 8%, previously 9.5% to 10.5%. We are also lowering our operational growth expectations for adjusted net income to a range of 9% to 11%, previously 11% to 13%. This change in guidance is reflective of our Q3 results, Continued impact from supply challenges and the ongoing vector and workforce challenges.

Speaker 3

Foreign exchange rates on our updated guidance are as of late October and reflect the continued strengthening of the U. S. Dollar. Beginning with revenue for the full year 2022, Due to lowering of our guidance and the impact of foreign exchange, we are now projecting revenue of between $8,000,000,000 $8,075,000,000 We lowered our operating expense guidance for the full year, reflecting lower expenses in both Q3 and Q4, which reflects our ability to manage costs. Additionally, it is worth noting that our expected Q4 expense decline is also impacted by an easier comp due to heavy spending in the Q4 last year.

Speaker 3

Additionally, our guidance for adjusted interest expense and OID was changed to reflect favorable changes to interest income. We now expect adjusted net income to be in the range of $2,270,000,000 to $2,310,000,000 And finally, we expect adjusted diluted EPS to be in the range of $4.83 to $4.90 and reported diluted EPS to be in the range of $4.51 to $4.59 While lower, Our full year 2022 guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue over the long term. Our success will continue to come from our diversified portfolio of enduring brands, driven by multiple sources of in line growth, productive innovation and our infrastructure to develop and expand markets globally. We expect to continue to execute across multiple dimensions of our business and capitalize on key growth opportunities for the foreseeable future. Now, I'll hand things over to the operator to open the line for your questions.

Speaker 3

Operator?

Operator

We'll take our first question from Erin Wright with Morgan Stanley. Please go ahead. Your line is open.

Speaker 4

Great. Thank you for taking my question. So when we think about Some of these headwinds and tailwinds related to 2022, what is now proving to be more challenging than anticipated? Is it mostly the supply chain issues or is it other And can you quantify the supply chain constraints, what sales would have been excluding these dynamics? And then How should we think about those broader headwinds and tailwinds from an operational perspective into 2023?

Speaker 4

As we think about both Livestock and companion animal, should low single digit livestock growth in 2023 be the right way to think about it? And then if that's Okay. So, Keith, how do we think about companion animal operational growth in 2023? And, I'll stop there. Thanks.

Speaker 2

Sure. Thanks, Erin. I'll start and I'll let Whitney build on this one. I mean, I think the first thing to start with is fundamentally and structurally the veterinary business And importantly demand for our products remains stronger than it was before COVID. I think we've got still a very healthy business.

Speaker 2

As you look at sort of the headwinds as we looked at Second half of this year, by far supply was the biggest and I'll let Whitney comment on sort of sizing them. I would say that was the significant driver for us In Q3 and as we look into Q4, I mean, certainly, we can talk about vet clinic visits as well. But I think for us, we really believe that the Supply issues that we were facing were really the primary driver for us. And as we look into 2023, I think the really good news around that is, As we look at the ones we faced this year, as we talked about supply from the beginning of the year, we had MABS issues. We worked through that.

Speaker 2

We're now in full supply On our Mavs and all the markets that we've launched in. So I think that one is one we've addressed. We did have tariff challenges in Q2, Q3, honestly, our supply came in too late in Q3. And I think if you look at Simparica Trio in particular, our competitors took advantage of stock shelves. So it's taken us a little longer to get back on shelf than we had hoped.

Speaker 2

But again, I think the Paris problem will work itself out as you look into Q4. We have challenges as well in Rev. And for Rev and Simparica, Q3 is a really important quarter for us. And so I think you saw that. I think again, The really good news is demand remains strong for these products and we've addressed most of the supply issues.

Speaker 2

There'll be some small ongoing ones as you know in our industry, Erin, you followed us a long time. We always have challenges around vaccines. When you supply as many products as we do across as many species globally, There's always some level of it and some of those will continue into next year, but we're really confident that the biggest challenges we were anticipating this year around MAV have been addressed. As you look at Para's both TrioRev, we'll work through that by the end of this year. We have really clear plans in place.

Speaker 2

I mean, obviously, there'll be some ongoing one in vaccines, but that's more usual course. So, Wettie, do you want to sort of get a for a second and third question?

Speaker 3

Yes, sure. Aaron, as we've been saying throughout this year, supply certainly remains a headwind to meeting global demand. And as Kristen mentioned, the timing of recovery on some of these is very important. So as we went throughout the year And face supply constraints, particularly in Trio, despite the fact that Trio has performed really well for us, growing 65% on a year to date basis, the reality is We had outages throughout the peak parasiticides season for Trio Q2 and Q3, though we recovered late in Q3. The impact was such that We allowed competitors to be more aggressive about placing products on shelves, which we saw that impact as we exited Q3.

Speaker 3

But going forward, we do I anticipate continuing to see some impact for Revolution or Revolution Plus where we are selectively looking at key markets to deliver those products against others. So that is something that we're carrying into the Q4 and we have reflected in the guidance that we have issued today. So While our business faces other impacts outside of supply, whether it's vet Workforce or macro in certain markets, by far the supply constraints are the biggest impact here looking at how we've seen the year So transition versus what we saw earlier. And so if you look at the guidance change here of about $200,000,000 reduction in guidance, I would say, FX and supply account for more than 75% of that with supply being by far the largest majority of that.

Operator

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

Speaker 5

Great. Thanks.

Speaker 6

I want

Speaker 5

to have a quick follow-up on that last point and then touch on something else. So on the supply issues, I think a lot of what you Comment on Chris and Leni was that as you guys had these challenges in the quarter, your competitors took advantage of stockpiles. How should we think about that longer term? Is that a temporary switchover? Meaning, can you gain that back once you resolve, Especially some of the auto products revolution, but also Trio, whether that happens this quarter or next quarter, are you going to be able To push those competitors out of those positions easily or is that something that's going to be a little bit more of a challenge to regain your footing there?

Speaker 5

And then I also want to touch on Librella approval, it seems like that time line has slipped a little bit with the OUS inspection date. I'm just wondering How does that change your launch expectations and ramp expectations in the United States? I mean, you talked about second half 'twenty three or later in 2020 So, just walk us through the dynamics there. Thanks.

Speaker 2

Sure. I'll start and I'll let Whitney build on this one. As you think about competitors, yes, I am very confident that we will get our shelf space back and there is this is I very much see this as temporary. We're not worried. As Whitney said, this product is really well received by our customers and by pet owners.

Speaker 2

It's growing 65% on the year. So I am very confident We will get that back. So I do see that absolutely as temporary. So I think the other important thing here as we look at Simparica Trio In particular is that when it comes to competition, the latest update we have is we are no longer expecting competition Early in 2023 based on what we're hearing. As always, this is hard as a private company and no one gives us much information as some of the private companies here and A lot of them are not public, but our basic intelligence at this point is we don't see something launching against us as well early in the year and we'll Clearly, leverage that opportunity to gain share as well.

Speaker 2

So I think that is also incremental news as we think about Trio. And when it comes to Librella, I mean, obviously, we were hoping for an approval this year. Depending on when we get it next year, we just have to everything moves based on what that is. We're still obviously hoping for a launch as we expected, but without knowing the exact timing of the approval into next year, it just moves proportionally as you probably know. I think that's just the only incremental news there.

Speaker 2

We're confident we'll no matter what we'll get a launch next year. But the timing of it is just we'll have to update it once we get the final approval on that. I know, Whitney, did I Anything there?

Speaker 3

I'll just add a couple of points on Trio. Look, if you look at combination Lisa, heartworm. It's still a relatively new standard of care. And what you continue to see is in this very important part of the market, which is north of $5,000,000,000 globally, This expansion going from topicals and collars into oils And then now with triple combinations, we'll continue to extend that into the market and grow the market as well. So even with competition, we expect to continue to grow.

Speaker 3

So this dynamic that we described that As we exited Q3 between Q2 and Q3, we see that as a temporary effect and we'll continue to drive And I'll share here and particularly since we are not anticipating a delay in terms of competition though it's hard to say exactly when it will come. It come in 2023, but we no longer expect it early in the year. With respect to Librella, what I would say is we continue to be extremely pleased in the product continues to perform better than our expectations across Europe. And though we've had capacity constraints that didn't allow us to be able to take full advantage of demand this year. And we've had to actually make trade offs in terms of delaying launches in other markets.

Speaker 3

As we exit the year, we anticipate next year being able to launch the product in additional markets outside the U. S. And outside of Europe. And the product again continues to perform really well for us. So we're very pleased with that.

Speaker 3

And so this sort of delay in terms of when the actual approval will happen in the U. S. Given the dynamics we're In terms of the expansion of 40% of the dogs that are being put on the product that are new to the market, the length of time, duration of use of the product, etcetera, all bode well for sort of continued growth in this area and expansion of the pain market beyond the timing of the launch, etcetera.

Operator

And we'll take our next question from Nathan Rich with Goldman Sachs. Please go ahead.

Speaker 7

Great. Thanks for the questions. I had a follow-up on the supply constraints as well. Whitney, it seems like based on your commentary on the second half revenue revision, the supply constraints It would be something like a 200 to 300 basis point impact on second half volumes. I just wanted to see if that number is in the right ballpark.

Speaker 7

And As we think about the go forward, will there be a headwind in 4Q? It sounded like those A large majority of the constraints may have been resolved by the end of the Q3. Just wanted to see what we should expect For the Q4, excuse me. And then, into 2023, would you anticipate there to be, any lingering supply constraints or should everything be resolved at that Thank you.

Speaker 8

Yes. So look, what I would

Speaker 3

say is supply issues is not unique to us. It's just given the Wide variety of products and species. It's relatively commonplace in this industry as I've learned since we've Coming in about a year and a half ago, I think the level that we're seeing now is certainly elevated over the last couple of years. And in particular, we saw more of an impact here in Q3 given the timing of our recovery on some of these, right? So I do think we expect to see some continued impacts into Q4, but we reflected those in the guidance that we just issued today.

Speaker 3

I mentioned Revolution, for example, being one of them and quite frankly throughout the year even in MAPS where we are confident in our ability to Fulfilled demand next year, not only in Europe, but other markets outside of Europe. We've made trade offs in mass even between, for example, Cytopoint and Libriella, Right. So I do think those impacts have had their effects on this year. But as we go into next year, we're confident in those. I think vaccines is an area that you typically see Certain supply constraints in and challenges, and I think we'll continue to see those into 2024.

Speaker 3

And as we exit the year, we'll continue to make progress on revolution, but it is Certainly having an impact on the Q4 as well is what I would say. Of course, we'll have a lot more color to provide On the next call with respect to 2023, but we feel confident on the biggest products that have the greatest impacts. If you look at Trio from a parasiticide perspective, confidence in terms of supply going into next year. And for our masks, particularly, Lebrella launches, etcetera, and for Cytopoint Next year, we feel very confident about that as well. So those are big movers for us going into 2023.

Operator

And we'll take our next question from Louise Chen with Cantor. Please go ahead. Your line is open.

Speaker 9

Hi. Thanks for taking my questions here. So I wanted to ask you with potential competition coming for some of your key products next year, do you still think you can grow through those if they do come next year? And then second question I had for you was on innovation in livestock. When you see that next phase of innovation?

Speaker 9

And when will we Possibly see growth getting beyond that sort of 3% to 4% that we've seen historically for a while. Thank you.

Speaker 2

Sure. Louise, in your first question with regards The competition, I think the good news is we're not expecting competition early in the year anymore on Trio. But regardless of when competition arrives, I do think we'll continue to grow through this. If you look at this category, even when Isoxazylenes were introduced and you saw 1, then 2, then 3, this category grew. We launched a triple combination and we grew incredibly well.

Speaker 2

I think there's plenty of space here. Whitney mentioned earlier, there's still movement from Capicals and collars, and this is a really innovative category. So I do believe you'll continue to see growth. As you look at dermatology, I would say the same thing. I think a competitor could help us continue to grow this market.

Speaker 2

There are still 6,000,000 untreated dogs. The usage of this product Still significantly below that of the U. S. When you have the same number of dogs with the condition. So we continue to believe there is growth across these.

Speaker 2

Obviously, growth may decelerate in Durham with a competitor, but I still think these are going to be growing markets. I think the innovation and don't forget, we continue to look at Look at life cycle enhancements for all of these products. We are not stopping with what we have. So I think there's a lot of visibility into competitor might come, but not necessarily Some of the innovations in these key product categories that we'll continue to do. With regards to innovation in livestock, Whitney, did you want to take that one with regards to growth rates?

Speaker 3

Yes, sure. Look, I think if you look at livestock, as we said, this is a segment that has grown in the So 3% to 4% range historically and given the impact that we're seeing from generic competition for JAKKSAN, ZOEMIX, etcetera, We've been performing below that. But as we sit here, if we for example were to pro form a out the Draxin impact, you would see growth in our Livestock business even in the quarter that we delivered a negative 3% on Q3, which is similar to last quarter. So I think as we look to exit this year, I think livestock will be slightly below the performance you saw in Q3, given the Some of the generic competition, but beyond that, as we look beyond exiting 2023 into 2024, etcetera, We'll have to take a look at what the macro is. I think if you look at cattle in key markets across Brazil and elsewhere in the U.

Speaker 3

S, we'll have to We continue to look at what the macro is. But in terms of innovation, we continue to make innovation that quite frankly, you're not seeing the impact of them in the current year because of the So if you look at innovation in terms of poultry with vector vaccines that we're starting to launch in the U. S, if you look at some of Swine vaccines that we're launching elsewhere, though we've had some supply constraints in those as well. So you're not seeing the full effect of those, But beyond this year and beyond the generic competition as that starts to plateau, you'll start to see growth coming out of our Lifestyle Business. I just want to make one more point going back to derm.

Speaker 3

We don't last earnings, We said we don't see competition for derm in the first half of next year. Now 3 months later, there's still no new news, right? And so I think as you know in this space, it's not that we have Specific data on what folks have and so it's about a 6 month timeframe that we look ahead. And 3 months later, we still don't see anything. It's not to say that we expect competition next year.

Speaker 3

It's just we don't have any data that says there will be any in the first half. So I just want to make that clarifying point as you ask the question around competition next year.

Operator

And we'll take our next question from Jon Block with Stifel. Please go ahead. Your line is open.

Speaker 8

Thanks guys. Good morning. Us both upfront, I think the 2022 op margin was I believe largely unchanged despite the lower revenue. And Weta, you mentioned managing OpEx, but I think you guys also wanted to invest. You've got some notable new opportunities in front of you.

Speaker 8

So How do we think about that? In other words, is this an OpEx push on the investment into 2023? Or should we still expect the bottom line growing decently above the top line next year 2023? And then Kristen, just to shift gears, can you just maybe elaborate a little bit on call it the company's line of sight into the supply constraints fully resolving in 2023? At least for me, it seemed like the Trio You know, came as a little bit of a surprise and maybe just a tack on to that.

Speaker 8

Do we think of these sales as lost, Fully lost or at least a portion push? Because I would think from a consumer to go from to a triple and then back To a duo, is there something where some of these can be recouped in the early part of 2023? Thanks guys.

Speaker 3

Yes. So I'll take the first part of the question in terms of how we see Margins and investments, etcetera, we've made a number of investments across the business, whether you look at what we're doing in R and D, what we've done with With respect to our field force and we're continuing to do across the diagnostics and our pet care field force for example in the U. S. We're making investments across our Supply chain and manufacturing, obviously, given the demand we're seeing across our products and anticipated launches of other products out into the future. So we'll continue to make those investments, But we do have the ability to manage discretionary spend and you see that play out in the Q3 where OpEx was below top line Well, in fact, other than the tax rate difference to last year, if you look at our earnings before taxes, those grew at 8% On a 5% top line growth.

Speaker 3

So you see that leverage playing out in the P and L and we have the ability to continue to do that. I think we'll continue to use price To drive margins and mix is favorable to us given companion animal continues to grow faster than livestock. So companion animal grew 10% In the quarter, where livestock declined 3%. So that mix is favorable to us, although we see some offset with respect to inflation and so on. But You continue to see those drivers and we can anticipate those going into next year.

Speaker 3

So we'll continue to make investments in select areas, again prioritizing R and D, Prioritizing manufacturing and supply chain, for example, but we'll manage discretionary spend elsewhere to still deliver leverage P and L, which is What we said, now there may be quarters where that doesn't play out exactly, but I think if you look at a year, you will see us continue to do that and that margin between Top line growth and bottom line growth may be less than what the business naturally can do, but that's because we're making investments where we see the need, but we'll still Managed to deliver annually, the leverage P and L is our target.

Speaker 2

And sure, I'll take your second question around visibility into supply resolution. Yes. When we started the year like many companies, across many different sectors, we knew supply challenges would be there, waiting on things. As you look at ones where to your point, were we a little surprised by what happened with specifically Trio and Rev? I mean the honest answer is yes, we thought they would resolve faster.

Speaker 2

Not that we weren't aware. This was a capacity issue. We needed to build capacity and specifically some of this at a 3rd party. And honestly getting that 3rd party on took us a little longer than we expected. We set an OpEx team over there to try to work on it.

Speaker 2

And the timing of the resolution took us longer than we expected Why am I have visibility to why I say it's better? Because we're having a weekly call. I'm looking at their output on a weekly basis For both Revolution and Trio and they're doing really well. I think they're delivering consistently. They're up and running.

Speaker 2

And so I have visibility and that's why I have strong confidence. And that's why Whitney has strong confidence that as we look into resolve through Q4, we're managing through back orders right now. So we just got to get product out to market And we're prioritizing the markets, the biggest ones and right now and we'll get it to everyone by the end of this year, early next year. But When you're back a few months on a product like Rev Plus for example, in markets where that's a huge product, it takes a little while to get them fully back in the supply. And that's why We have full confidence.

Speaker 2

We knew what the issue was. It was capacity there. With the Revela and Valencia, it was component parts. And we knew we were Competing as well. That's why Whitney was talking about we were making trade offs between products there.

Speaker 2

We have that in full supply. A lot of these were some were COVID related, Some of these were capacity related and some were component parts related. It's been challenging for many companies to work through this, but We are as a leadership team managing this very carefully as Wendy and I have said on the first and second quarter calls, constantly working with GMS. We have full visibility into what is happening for each of these products and that's why we have confidence as to when they will resolve and when we'll get into full supply in key markets. So hopefully anything else you want to add

Speaker 3

to that? Yes. Look, I just think One of the things that I've really learned in the last 18 months being in this space is, it's not if you recover from a supply Constraint is when you recover really matters. So we talk about that already in parasiticides from a season perspective, but that's true too across livestock. If you look at Getting supply in time for a fall cattle run-in the U.

Speaker 3

S. Is important. And so if you missed that window, you have a greater impact than you thought. So if you were planning to And executing forward the timing of that and you recover a little bit later, that's where you start to see the impact. And I think that's what's played out here as we exit Q3 and why some of this might Might appear as a little bit of a surprise to you.

Operator

And we'll take our next question from Brandon Klipp with William Blair. Please go ahead. Your line is open.

Speaker 6

Hi, everyone. Thanks for taking the question. I wanted to focus on we had talked About 75% of the lowered guide was FX and some of the supply constraints. Maybe that smaller portion, the 25% that's left, I think was vet staffing issues. So maybe can you talk a little bit about what kind of change, what incrementally maybe got worse in the vet Staffing issues, how that's trending into the Q4, so we can kind of frame up how that might be a headwind as we go into 2023?

Speaker 6

And really how what kind of confidence you have that it's not maybe a demand issue as macro conditions worse and it's really just a debt staffing issue? Thanks.

Speaker 2

Sure. I mean, look, I'll go back to where I started. If you look at demand at the vet clinic, there's no question that it is fundamentally remaining Strong. Current staffing and vet visits is ahead of where it was pre COVID. So this is not like, oh my God, everything went down, where are we going.

Speaker 2

It is a realignment. And I think why are we confident in demand? Well, there are more pets. I mean, why we have a capacity problem is not actually that there are If there are more pets than we had before as we saw the sort of pandemic boom, the pet parents are more millennials. They spend more time on their pets, spend more money on their pets, they're more invested in the preventative care of their pets, which increases demand.

Speaker 2

So we remain very confident that demand is very strong. It is proved resilient through other challenging macroeconomic times. So what we need to work with vets on is how to better leverage Vet techs and other ways to make sure that they can see as many pets as they possibly can. So we remain very confident this is not A demand issue, it is a capacity issue. We have to create more capacity than they had pre COVID.

Speaker 2

There's ways of doing this by helping them improve their productivity across the different spaces. But I mean just putting that in numbers, why are we confident there's a we're fine is if you look overall right now, The spend per visit is up 9%. Clinic revenues are up 5% in the quarter. We did see a 4 decline in vet visits, but that was over a quarter at unprecedented levels if you look back to last Q3. So the veterinary industry is structurally and fundamentally in good shape.

Speaker 2

We have to help them create additional capacity for all the new pets we have, but I think demand remains strong.

Speaker 3

I would just say, look, As I said earlier, there are other factors that impact our business. I mean, you do see some macro in some select markets. So if I look at Brazil, for example, you see a trade down from beef to poultry and swine. If you look at China, we continue to see lockdowns Impact consumption, particularly on the livestock side. But if you look at companion animal performance, even in those markets, Despite the significant lockdowns in China, you see strong double digit growth in companion animal.

Speaker 3

We saw double digit growth in companion animal even in Brazil Like the macro. So I do think this speaks to the resiliency of particularly on the companion animal side of the space even in challenging macro areas. And then the other thing I'll say with respect to a very strong comp is, if you look at Derm, our Q3 Last year, derm grew 26% globally. It was north of 20% in the U. S.

Speaker 3

And so when you have Labor capacity constraints at the vet clinic being able to perform above that level of growth from a prior year perspective becomes a challenge. So Yes, supply is by far the biggest challenge we faced all year and certainly in Q3, but the macro continues to be largely from a demand perspective Remaining strong.

Operator

We'll take our next question from Chris Schott with JPMorgan. Please go ahead.

Speaker 5

Great. Thanks so much. Just a couple of quick ones here for me. I just want to come back to Trio. With this competitor delay that you're talking about for early next year, Just to make sure I'm clear, is there going to be any supply issues as a rate limiter for growth of Trio in 2023?

Speaker 5

Or was this more of a one time issue in 2022? So I guess can you fully take advantage of that delay in competition as we think about the spring season next year? And And my second question was on these just these ongoing supply issues. I know this is in the near term, you can't do much about this. Is there an ability to Either hold higher inventories or just think about supply differently kind of going forward to ensure that I guess these issues happen again in the future.

Speaker 5

Again, I know you can't deal with that in the 3Q, but just as we think about kind of 2023 and beyond, or do you view this as this kind of Moment in time where there's not much of an ability to manage this. Thanks so much.

Speaker 2

Sure. As you look at Trio for 2023, yes, we will be able to leverage The opportunity. Again, the challenge we had this year was getting new capacity online with a third party that took us longer than we expected. That is online and performing well. So We remain confident going into next year that we can leverage that opportunity and certainly have plans in place to do so.

Speaker 2

And your second question was around what was your second question?

Speaker 3

The ability to manage Inventory and so on to 2. Yes.

Speaker 2

I mean, look, we're holding by the way, we have tried to do that already. If you look focusing on resilience and managing inventory better, you look at our inventory, we've invested a lot in making sure that we have component parts. As we see in our industry being out of stock has a significant cost to the company. So We're certainly looking at how we can invest in that. But prudently, a lot of the build up you're seeing right now is in raw materials and things like that to make sure we have on hand what we need to make it and we're focusing that on our most important product.

Speaker 2

So you can manage a lot of this through inventory, Assuming you have capacity, but as you look at the biggest challenges we faced this year, it was getting onboard capacity in key products and getting some of the component parts for things like mabs And we have figured that out, but in the sense of the math and we do have the capacity online. So you can definitely leverage inventory in certain cases except when you're challenged It's capacity or component parts, but I don't know if you want to comment. Tom, the

Speaker 3

only thing I would say is, look, the actions we've taken this year and continue to execute against give us confidence in our ability to capitalize on the Opportunity here with a delay from a competition standpoint. But what we've learned over the last 2 plus years is things happen in this world, whether it's Europe or Oracle and so on. So barring any sort of major events, we do feel confident with our ability to capitalize on this And execute to meet the demand for the product. And we anticipate we'll continue to see demand beyond when a competitor comes into place as well the reasons we've already stated.

Operator

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

Speaker 10

Hi. Thank you for taking my questions. Most on the supply chain have already been answered. So I'll start with Librella, I think you mentioned it's a blockbuster. It's only outside of the U.

Speaker 10

S. I think we typically think of animal health as being or companion animals being kind of Half in the U. S, half outside the U. S. Is there something specific about outside the U.

Speaker 10

S. That's made it resonate so well? Or should we still think of this as maybe a $200,000,000 product if it was Available in the U. S. And then a question for Whitney.

Speaker 10

You mentioned a lot more, I think, on competition in livestock than I've Heard commentary even in the past. I mean, I think you said poultry vaccines and Draxin, what Draxin, of course, is being the ongoing issue. Can you talk about is there a way to quantify how much more this quarter or what we're seeing now is competition versus just dynamics across Livestock, because of course dynamics across livestock have been a little bit on the weaker side. And I just want to see how much is transitory and how much of this might be permanent? Thank you for the questions.

Speaker 2

Sure. So I'll take your first question and I'll let Whitney take the second question. As you think about Librella, we are proud that it is a blockbuster in its first Full year in launch outside the U. S. I would note that it hasn't even been launched in every market outside the U.

Speaker 2

S. I wouldn't even say it's everywhere there. And if you just take a slight step back here, as you look at the pain category globally in dogs, traditionally it's been about a $400,000,000 market. We believe with this product, we can double the size of that market. We've talked about this before, taking a $400,000,000 market to an $800,000,000 market.

Speaker 2

We believe we can do this because we think this product efficacy is really, really strong. And so as you think about that, we think we can get more dogs To be cared for, it doesn't have some of the safety profile issues of other products. We're seeing that people are staying on it longer. It is already in Europe the number one pain product, as you think about it. So we are we very strongly if you look at this 40% Customers to Libriella are new to the category.

Speaker 2

This really speaks to the power of this product. That's excitement with it. And we're seeing a 90% reorder rate. So So I think you're going to see significant potential for this product as you look at growing it outside to other markets as what we mentioned earlier beyond the ones that's already launched in international. And then certainly when you add to the U.

Speaker 2

S, we've seen in some of these really advanced technology products, the U. S. Is often bigger than international on most of these products. So We remain very optimistic for the success of this product just based on so far it's we've talked about this on previous calls. It's done incredibly well and where we've even been upside surprised is how many months many customers are staying on it.

Speaker 2

So we'll continue to see how that evolves over time, but we're very optimistic about this product, not just in international, but as we bring it into the U. S. And as we expand it across international. But Whitney, do you want to take the second question on livestock?

Speaker 3

Yes, sure. Look, first thing I would say is there is no structural change with respect to the competitive nature of livestock. It's always been Competitive and it remains so. So, our commentary here today and what we've been talking about over the last couple of years isn't necessarily different. What is, Is that generic competition has had an impact on us over the last couple of years as we anticipated, as we said.

Speaker 3

So Jackson, if you look at Jackson prior to LOE was roughly in the mid-300s, call it $350,000,000 in revenue. That's by far the largest Sort of individual product within livestock and so certainly was we anticipated about a 20% impact in the 1st year another 20% in the 2nd year. The first year was a little bit better than that. It was south of 20%, but the second year is above that. And so still in the neighborhood maybe a little bit worse than what we thought initially With respect to Jackson, but there's no other large product like that, I would say, in the portfolio.

Speaker 3

The Zoetis also has seen some competition, but was nowhere near the size of a Jackson. So Short story is no change in terms of what we're seeing in terms of the competitiveness of livestock. It's just a little bit more intensification in terms of products that have Become generic if they are sizable.

Operator

And we'll take our next question from Steve Scala with Cowen. Please go ahead.

Speaker 11

Many thanks. First, just to clarify, in the prepared remarks, it was stated that supply challenges were more pronounced in Q3 And that there is increased uncertainty. Can you clarify why supply challenges peaked in Q3 and why there is now more Uncertainty as opposed to what was seen in Q2 or apparently what is anticipated in Q4? And then secondly, China lockdowns were mentioned. Can you quantify the impact?

Speaker 11

And then lastly, what is the capacity of Lincoln to manufacture the pain monoclonal antibodies? I thought at one point Some small scale manufacturing was done there. Is that a possibility to be expanded? Thank you.

Speaker 3

So I'll start and see if Kristen wants to add anything. With respect to the supply challenges, I think we've described in a fair amount of detail What we saw happen and why the impact was more noticeable in the Q3, though we also made significant progress as we exited the quarter. So The impact that we're seeing in the Q3, if we double click on parasiticides, for example, particularly with Trio, from Q1, we've had outages on Trio across certain strengths, etcetera. And we continue to run With constraints throughout the year, but in particular in Q2 and Q3, those outages really left more space across vet clinics for competitors And so as we got into Q3, again continuing to be in the parasiticide season, we saw switchovers With respect to new patients coming off of collars and topicals for example going into holes rather than coming into our product going into some of our competitors Our competitors filled shelves when we had gaps. So that's why we saw a bigger impact in that in terms of what we saw, particularly for Trio.

Speaker 3

Revolution has been an issue quite frankly throughout the year and remains. So even as we've gotten into Q4 here, which is why we say we continue to see uncertainty in certain products Here, vaccines, I would say, are relatively commonplace across the industry in terms of having supply issues. And again, we've seen a little bit more of those this year. And again, particularly in Q3, given the cattle run-in the U. S.

Speaker 3

In the fall, etcetera. So we saw some of that the impact of those outages more pronounced in the quarter. So hopefully that gives you plenty. If there's a follow-up, I'm sure you can take it up with Steve offline as well, but That's the detail that we've shared. With respect to capacity for mAbs, these are long lead time areas, right?

Speaker 3

If you take the time to manufacture, it's long lead time. The time to add capacity in monoclonal antibodies is also relatively long. So we've been working on those for some time, which is why as we've gone through this year and we expressed confidence into next year being able to not only capitalize on demand that we We'll be able to launch in other products outside of Europe across our international segment with confidence because we have We've been able to expand in various areas. I won't go into a specific site in terms of what their capacity is, but suffice it to say Our molecule into body manufacturing is more than just one location in terms of where we do that. And you've seen us take an uptick as well in terms of CapEx Going from last year to this year, we've talked about that all year.

Speaker 3

And you continue to see an uptick in CapEx as we go into the next year or 2 as well, Because we continue to make investments in capacity and monoclonal antibodies are an important platform for us, not only with respect to derm with saddle point With the pain franchise, but other products that we're working on in our pipeline will require those. So we'll continue to make investments with cassetteumab capacity.

Speaker 2

A few follow ups there. I mean, for starters, the comment on uncertainty had to do with the macroeconomic environment. I mean, the question is we're still seeing very strong consumer demand, but There's still a belief that we'll have potentially recession in Q1, Q2, Q3. It was not about increased uncertainty to be clear in supply. It was uncertainty as to what the macroeconomic environment and what we'll be looking at into 2023 or even in Q4.

Speaker 2

So let me be clear, the uncertainty comment that was not related to supply. The only comment I'll make is with regards to the China question. I mean, look, in Q3, China grew 35% even with these lockdowns. Again, underlying what we've been saying, the demand for our products remains very strong. What's important there is, if you look like 4, 5 years ago, it was a majority livestock business.

Speaker 2

It became about fifty-fifty last year between livestock and companion animal. And if you look at it right now, the lockdowns are clearly impacting livestock. But companion animal given its close to fifty-fifty grew almost double what you see if China's growth at. So even with the lockdowns, we really see China remaining a strong market for us And growing quite well. So I think we can weather those lockdowns.

Speaker 2

I mean look if we the lockdown stuff which does not appear based on the news in the last 24 hours To be something that's going to be happening in the near term, you might see livestock recover a little faster than what it is. But again, even in this environment, even with lockdowns, You saw 35% growth in Q3 in China. So I would just underscore that.

Operator

And we'll take our next question from Elliot Wilbur with Raymond James. Please go ahead.

Speaker 12

Hi, guys. This is actually Michael Parlery on for Elliot. For Zoetis. So first one from me. You guys might have touched on this earlier, so apologies if I missed that commentary.

Speaker 12

But Any early commentary on how we should be thinking about currency impacts on top line and margin trends into 2023? And then second question is growth contribution from price this quarter, I believe you said was 1% compared to 3% over the past two quarters. Most of the industry seems to be moving in the other direction given the current macro environment. So just wondering If you guys could touch on perhaps what negatively impacted that growth contribution in the period and how to be thinking about that moving forward? Thank you.

Speaker 3

Yes. I'll start and see what Kristen will add. First of all, with respect to currency, if you look at this year, Top line impact from FX given the strength of the U. S. Dollar is about 4%.

Speaker 3

So on the year, 4% which is roughly $309,000,000 headwind versus prior year rates. If you look at the impact All the way down to the bottom line, it's about 8%. And so from an EPS standpoint, that's about $0.36 of headwind. It's about $0.07 worse than our prior guidance given continued strength of the U. S.

Speaker 3

Dollar. So that's where we are. We're not going to forecast what FX might do, But our guidance is based on where REITs were at the end of October here. And we'll continue to update, but we'll focus on commentary around operational growth given FX's impact, but that's the impact that we're seeing this year. If I didn't go into price here, On a year to date basis, if you look at our companion animal product sales and revenues, we've taken about 5% price on a year to date basis.

Speaker 3

And so what is offsetting that largely is what we've been talking about here today, which is the generic competition, particularly on Jackson that's offsetting That growth where you see a net of 1% in the quarter, but on a year to date basis, our price is about 2%. If you Include the impact of generic competition and higher than that without companion animals where we have innovative products, We continue to see strong demand and we're taking price to the tune of about 5%. And as you look at our margins, roughly 90 basis points down year over year. FX is by far the biggest contributor to that. So if you take FX out, you've got about a 20 basis points.

Speaker 3

So essentially, our price is offsetting Increases in manufacturing costs, etcetera, between price and mix and so on is what we're seeing. So that's where the offset is. We're right about Where you might see across elsewhere in the industry, our vet practices given the strong demand we continue to see are actually taking price at or above what we're taking In that 5% of companion animal as well.

Operator

And we'll go next for Balaji Prasad with Barclays. Please go ahead.

Speaker 13

Hi, this is actually Mikaela on for Balaji. Thanks for taking my question. Just on Trio, just wondering what the penetration has been for corporate accounts and just how much room is left for further expansion? Thank you.

Speaker 3

Yes. So we've been very pleased with the penetration across large corporate accounts. We're about 90%. But we still see more room even within those large corporate accounts to increase utilization of Trio. We continue to work on those and that's part of where our expanded field force in the U.

Speaker 3

S. It's focused in addition to obviously with the launches of other products, etcetera, and across derm to continue to penetrate and so on. So we've been very pleased With the overall penetration across large corporates, we continue to work on smaller and mid sized accounts as well. And we see more room within those penetrated clinics to get better utilization on Trio. I don't know if you would add anything to that, Kristen?

Speaker 2

No.

Operator

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

Speaker 2

Great. Look, thanks everybody for your questions today and for your continued interest in Zoetis. Just to summarize, we We continue to see strength across our diverse global portfolio, especially in our products for pet care and the fundamental drivers of animal health, as I've said throughout this call, remain fundamentally and structurally very strong. We continue to invest in talent and innovation, certainly in manufacturing expansions as we talk to you today that can support this future growth, while adapting and optimizing our business for the increasingly dynamic macroeconomic environment that we all operate in. We look forward to keeping you updated on future calls.

Speaker 2

Thanks so much for joining us today.

Operator

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

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Zoetis Q3 2022
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