Zoetis Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2022

There are 13 speakers on the call.

Operator

Welcome to the Q1 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. In the interest of time, we ask that you limit yourself to one question and then queue up again with any follow ups. Your line will be muted when you complete your question. When posting your question or when posing your question, Please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star 0.

Operator

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 Q1 2022 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer and Wettene Joseph, our Chief Financial Officer. Before we begin, I'll remind you that 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. GAAP measures He is included in the financial tables that accompany our earnings press release and the company's 8 ks filing dated today, Thursday, May 5, 2022.

Speaker 1

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 Q1 earnings call for 2022. Zoetis delivered a strong quarter to start the year with 9% operational revenue growth and 8% operational growth in adjusted net income, driven by the strength of our companion animal portfolio. We generated similar growth for both the U. S. And international segments with 9% 8% operational growth respectively.

Speaker 2

Our strength across parasiticides, dermatology products, Monoclonal antibodies and diagnostics are all capitalizing on the marriage of positive trends in pet care with customer driven science coming from Zoetis. In the Q1, we grew 20% operationally in our companion animal portfolio. As we expected, our livestock portfolio We continue to face challenges declining 6% operationally in the quarter largely due to declines in swine product sales in China and generic competition from Draxen. As we look at the rest of the year, we are updating our guidance to reflect the negative impact of recent changes in foreign exchange rates, But this has no impact on our previous operational growth rates and assumptions for the year. Even as we face uncertainties related to the war in Ukraine, COVID-nineteen lockdowns, inflation and ongoing supply chain constraints, we remain confident in the underlying strength and performance of our business.

Speaker 2

Our diverse portfolio, global scale, talented colleagues and continuous innovations remain the foundation of our long term success and durability. And we continue to invest in the resources, marketing programs and manufacturing capacity we need to support our growth. In R and D, we're building new capabilities and pipelines across our companion animal and livestock portfolios to ensure our long term performance. In the Q1, we continued to receive approvals for new products and indications, develop lifecycle innovations for major brands and expand our portfolios into new markets. On the Livestock side of the business, we expanded our cattle vaccine portfolio With an approval in the U.

Speaker 2

S. Of Protiviti, the 1st modified live vaccine to offer protection against mycoplasma bovis. This vaccine provides cattle producers and veterinarians with broader overall protection against bovine respiratory disease. We also gained approval in Brazil for Draxin KP, which is also a treatment for BRD and combines the antimicrobial properties of Draxin with the non steroidal anti inflammatory, ketoprofen, to rapidly reduce fever in a single dose. Draxin KP is also approved in the U.

Speaker 2

S, Canada and European Union, Australia and Mexico And it has been an important part of how we continue to distinguish the Draxen brand in the face of generic competition. In poultry, we received approval in Brazil for Polvac Precerda HVT IBD, our recombinant vector vaccine that is also approved in the U. S. And Canada. On the companion animal side of the business, we received another approval for SolenciA, the industry's 1st monoclonal antibody for osteoarthritis pain in cats, adding Australia to the U.

Speaker 2

S, European Union, UK, Canada and Switzerland and another MAP therapy Cytopoint received a claim extension in Canada, So it now covers both the treatment of atopic dermatitis and allergic dermatitis in dogs. CYTOPOINT and ABLOCOL continue to grow significantly And expand the dermatology market as disease awareness and treatment options become more known to pet owners. We have a strong leadership position based on our innovative science and do not believe competing products will come to market in 2022. We also continue building our multipurpose diagnostics platform, Vetscan Imigis, with the recent addition of blood smear testing. Introduced in September 2020, Vetscan images is a first of its kind technology with a multitude of applications including AI fecal analysis, Digital Cytology Image Transfer and now AI Bloodsmear, all helping veterinarians broaden their in clinic diagnostic offerings to provide the best care possible for dogs and cats.

Speaker 2

For the last 2 years, I've been speaking to you about our catalysts for growth And those continue to drive our performance. Our outlook for growth in international markets remains very positive based on our diverse global footprint and continued expansion opportunities for key brands like Simparica Trio, Apoquel, Cytopoint, Librella and Valencia. In terms of Ukraine, we have condemned the Russian invasion from the outset And we are deeply saddened by the senseless violence being brought upon the people of Ukraine. Our company, colleagues and the Zoetis Foundation have worked together to provide veterinary care, medicines, financial support and evacuation assistance to those in need. With every decision, even the most difficult and complex ones, we're guided by our purpose to nurture the world and humankind by advancing care for animals.

Speaker 2

While we have suspended all investments and promotional activities in Russia, the continued care of pets and livestock remains an essential responsibility for Zoetis and our colleagues. And we remain focused on maintaining a critical supply of animal medicines and vaccines for veterinarians and producers there. We anticipate a negative impact of about 1% to our original full year growth expectations due to Ukraine and Russia, But we are maintaining our previous operational growth rates based on the overall strength of our Companion Animal business and the positive momentum of expanding our U. S. Pet Care and Diagnostic commercial teams.

Speaker 2

Speaking of diagnostics, another catalyst for growth, We delivered 12% operational growth in the Q1. We continue to invest significantly in this space to accelerate our growth. For example, we've been shifting our go to market model this year and building a dedicated field force for our diagnostics portfolio. This hiring is a significant part of a 40% increase to our total U. S.

Speaker 2

Companion animal field force. We see billboard expansion as a key lever to supporting growth opportunities in our Diagnostics and Pet Care businesses. We also continue to see very strong growth in Pet Care as we expand our major companion animal brands in markets around the world. Simparica Trio is doing very well as it continues to gain market share based on veterinarians preference for an innovative triple combination parasiticide for dogs. Pet owners have also been demonstrating strong loyalty rates after trying Trio and we are excited by the ability of our direct to consumer campaigns and additional field force colleagues to increase interest in this product.

Speaker 2

Librella is also doing incredibly well across Europe and we remain confident in the blockbuster potential for Librella in 2022 and CELENCIA in the longer term. As we see improvements in supply, we will be launching CELENCIA in additional markets such as Canada and Australia this year. In terms of the U. S, we are still planning a launch of Solencia in the second half of the year and we anticipate approval for LaBrella by the end of the year, assuming FDA inspections are completed at facilities outside of the U. S.

Speaker 2

Overall, we continue to benefit from pet care trends in terms of increased demand, clinic revenues, pet ownership and spending habits. Finally, a brief update on supply. As I mentioned last quarter, we are managing certain isolated supply constraints for La Brella, Silenciae and some of our other products as we compete for some limited manufacturing inputs critical to human health during the pandemic. We are also seeing additional global supply challenges related to Russia's invasion of Ukraine and the recent COVID-nineteen resurgence in China. While some of these challenges are Global Manufacturing and Supply Network to mitigate any impacts to our overall business and our commercial teams are ensuring control launches for new products And coordinating with customers to minimize any impacts on their animal care.

Speaker 2

In conclusion, we are off to a good start for the year And we're maintaining our operational growth expectations for the full year. Our diverse and durable portfolio, global scale and pipeline of innovations have us well positioned to meet customer needs and shareholder expectations for this year and beyond. Thank you. Now let me hand things off to Whitney.

Speaker 3

Thank you, Kristen, and good morning, everyone. As Christlyn mentioned, we had a very strong start to the year with continued growth across a number of our core product franchises. Today, I will focus my comments on our Q1 financial performance, the key drivers contributing to our performance and provide an update on our full year 2022 guidance. In the Q1, we generated revenue of $2,000,000,000 growing 6% on a reported basis and 9% on an operational basis. Adjusted net income of $625,000,000 grew 4% on a reported basis and 8% on an operational basis.

Speaker 3

Of the 9% operational revenue growth, 3% is from price and 6% from volume. Volume growth of 6% consisted of 5% from new products, which includes Simparica Trio and Libriella, 3% from key dermatology products, while other in line products declined 2%. The decline in other in line products was expected and largely the result of a difficult comparison to the prior year and the impact of our swine business in China. Companion animal products led the way in terms of species growth growing 20% operationally with livestock declining 6% on an operational basis in the quarter. Our small animal parasiticide portfolio was the largest contributor to growth quarter, where our innovative and diverse flea tick and heartworm portfolio drove growth of 25% operationally.

Speaker 3

Simparica Trio posted global revenue of $164,000,000 representing operational growth of 83% versus the comparable 2021 period. In Q1, Simparica Trio was the number one canine parasiticide sold in the U. S. In terms of revenue And we recently launched Trio in Japan, a sizable international heartworm market. Meanwhile, our key dermatology products Apoquel and Cytopoint significant global growth again with $307,000,000 of revenue representing 28% operational growth against a robust prior year in which keyderm grew 24% in the Q1.

Speaker 3

In Europe, our recently launched monoclonal antibody, Rubrella, which is for osteoarthritis pain in dogs also meaningfully contributed to growth in the quarter, posting $21,000,000 in sales. Our Global Diagnostics portfolio recorded $98,000,000 in revenue and had operational sales growth of 12% in Q1 growing across both our U. S. And international segments. Growth was largely driven globally by consumable usage and new products.

Speaker 3

We also continue to see growth in the placement of new devices in international markets. Diagnostics remains a key growth driver for Zoetis we continue to make significant investments in our field force, new technologies and reference lab expansion. Our LifeSpike business declined 6% operationally in the quarter. Our revenue decline in China swine products was a result of both declining pork prices due to increased supply and a difficult prior year comparable. In the U.

Speaker 3

S, generic competition for Jackson and unfavorable market conditions for producers primarily resulting from elevated input costs also led to a decline in cattle products. Our fish portfolio again grew double digits in the quarter And along with the strength of our other emerging markets partially offset the broader decline. Overall, lifecycle performance in the quarter was in line with our expectations. Now moving on to revenue growth by segment for the quarter. U.

Speaker 3

S. Revenue again topped $1,000,000,000 in the quarter growing 9% with companion animal products growing 18% and livestock sales declining by 11%. U. S. Pet care vet practice trends continue to be positive with practice revenue growing approximately 5% even in the face of challenging prior year comparisons and the Omicron variant wave that impacted both visits and the availability of labor at clinics in January February.

Speaker 3

Spending per visit increased 8% in the quarter, while visits declined 3%. Underlying demand for veterinary care remains robust throughout the country, even as people return to work. And we believe vet clinic revenue will continue to grow at levels above What we were seeing prior to COVID as the standard of veterinary care continues to increase through innovation, better demographics, higher compliance and more pets. Companion animal growth in the U. S.

Speaker 3

Was driven largely by sales from our parasiticide portfolio as well as key dermatology products. Growth of Simparica Trio was again strong in the quarter with sales of $147,000,000 in the U. S. Growing 77%. We continue to meet our clinic penetration targets and take share within individual clinics with additional runway for future revenue growth.

Speaker 3

Pet owner satisfaction material is approximately 90%. Key dermatology product sales were $194,000,000 for the quarter, growing 23% with ApriQUEL and CYTOPOINT each significantly contributing to growth. Our investments to support the portfolio have been instrumental in driving more patients into the clinic and we'll continue to invest meaningfully in this space As a large portion of dogs with dermatitis remain under treated, representing an opportunity to further expand the market. In an effort to support all of our long term sustainable sources of growth in our companion animal portfolio, In April, we launched our new pet care go to market strategy, expanding our U. S.

Speaker 3

Companion animal field force by approximately 40% and creating dedicated and separate diagnostic and pharma coverage for our portfolio of products. U. S. Livestock declined 11% in the quarter, primarily resulting from our cattle business. This was expected as we experienced challenges from generic competition for Jackson, which didn't exist in the same quarter last year, as well as elevated input costs continuing to weigh on producer profitability.

Speaker 3

Meanwhile, our poultry business continues negatively impacted by the expanded use of lower cost alternatives resulting from reduced disease pressure from smaller flock sizes as well as generic competition for Zoamix. Swine product sales grew in the quarter as a result of favorable market conditions for producers and higher disease prevalence. Moving on to our international segment, where revenue grew 3% on a reported basis and 8% operational in the quarter. Companion Animal revenue grew 23% operationally and livestock revenue declined 3% operationally. Increased sales of companion animal products resulted from growth of our key dermatology products, monoclonal antibodies for alleviation of ORE pain and our parasiticide portfolio.

Speaker 3

Some of the key brands continue to benefit from our international direct to consumer campaigns in Latin America and parts of Europe and we remain excited with the long term prospects of these programs. We are encouraged by the performance of our monoclonal antibody for orapane With Libella generating $21,000,000 and Silencio delivering $3,000,000 in first quarter sales. Libuela remains on track to exceed $100,000,000 in revenue this year. As we mentioned last quarter, Zuigela became the number one pain product in the EU in the 1st year of launch, with the underlying performance metrics being very favorable for future growth. Reordering rates remain at around 90%, compliance exceeded 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.

Speaker 3

Meanwhile, international livestock declined 3% operationally in the quarter. This decline was driven predominantly by our swine portfolio in China. As we indicated over the past several months, increased pork supply in the market led to a significant decline in pork prices, which impacts producer profitability. In addition, our Q1 of 2021 presented difficult comparative period as pricing and producer profitability in that quarter had been at an all time high. While we expect China to return to growth in the back half of the year, we anticipate a challenging second quarter for our swine portfolio.

Speaker 3

Partially offsetting our decline in swine was growth in our fish, poultry and cattle portfolios. Our fish portfolio grew double digits again this quarter driven by growth of the alfafluxc lice treatment product and AlphaJET's LiveVac vaccine for SRS in Chile. Sales of cattle products grew in key markets due to favorable market conditions and pricing in Brazil and Australia as well as demand generation efforts in emerging markets such as Turkey and China. Now moving on to the rest of the P and L for the quarter. Adjusted gross margin of 71 point 6% improved 60 basis points on a reported basis compared to the prior year resulting from favorable product mix, price, Foreign exchange and lower inventory charges.

Speaker 3

This was partially offset by higher manufacturing and freight. Adjusted operating expenses increased 14% operationally with SG and A growth of 16% operationally driven by headcount related compensation costs, C and E, advertising and promotion, as well as direct to pet owner campaigns for key brands. R and D expenses increased 4% operationally due to higher compensation costs. The adjusted effective tax rate for the quarter was 18.9%, a decrease of 20 basis points driven by the impact of favorable discrete tax items and settlements with certain tax authorities slightly offset by changes in the jurisdictional mix of earnings. And finally, adjusted net income grew 8% operationally and adjusted diluted EPS grew 9% operationally for the quarter.

Speaker 3

Capital expenditures in the Q1 were $115,000,000 We are still anticipating a significant increase Capital expenditures for the full year 2022 primarily related to investments in Ireland, the U. S. And China to support manufacturing Needed to meet our long term growth demands. In the quarter, we returned over $500,000,000 to shareholders Through a combination of share repurchases and dividends, we purchased approximately $361,000,000 of Zoetis shares, representing our largest dollar based quarterly share repurchase ever. Now moving on to guidance for the full year 2022.

Speaker 3

Foreign exchange rates on our updated guidance As of late April and reflects the recent strengthening of the U. S. Dollar. Please note that any update to our full year guidance Are related directly and only to foreign exchange and that the ranges of our operational growth rates for revenue of 9% to 11% and adjusted income Of 10% to 13% remain the same as our previous February guidance. We are holding these top and bottom line operational growth rates the same despite the conflict in Russia and Ukraine negatively impacting our expected full year operational growth by 1%.

Speaker 3

We feel we can offset this impact with the strength of our companion animal portfolio. Beginning with revenue for the full year 2022, We are decreasing both the low and high end of the range by $100,000,000 to reflect the impact of foreign exchange. We are now projecting revenue of between $8,225,000,000 and $8,375,000,000 while maintaining our expected operational growth of 9% to 11%. For adjusted net income for the full year 2022, we are decreasing Adjusted net income is now expected to be in the range of 2.365 $2,420,000,000 while maintaining our expected operational growth of 10% to 13%. And finally, we expect adjusted diluted EPS to be in the range of $4.99 to $5.09 And reported diluted EPS to be in the range of $4.65 to $4.77 Sales of companion animal products will be the primary growth driver in 2022 with the continued strength of our diverse parasiticide portfolio, Further expansion of our key dermatology products, the adoption of our monoclonal antibodies for OA pain and growth in point of care diagnostics.

Speaker 3

We also continue to see a very favorable global companion animal backdrop for 2022. For livestock, The fundamental macro trends which make animal protein an essential business remain intact and we believe more normalized growth will occur in 2023. While guidance represents our expectations for the full year, I would like to provide some color on the expected phasing of growth for the remainder of 2022. We expect top line operational growth for Q2 to be slightly below Q1 as regional restrictions related to COVID-nineteen in China temporarily pressure day to day business and certain supply chain activities. We also expect a similar foreign exchange impact in Q2 that we experienced in Q1, where reported revenue was negatively impacted by about 3%.

Speaker 3

In addition, the significant investments we are making early in the year to For future revenue growth, including field force expansion in the U. S. And incremental DTC advertising will drive OpEx growth in Q2 at a faster rate than revenue, impacting Q2 bottom line profitability more materially than in the back half of the year. We expect that foreign exchange in Q2 will have a negative impact to the bottom line of about 5%. Our full year 2022 guidance once again reflects our Our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue.

Speaker 3

Our success is derived from our diversified portfolio of enduring brands, driven by multiple sources of inline growth an agile and disciplined innovation engine and an infrastructure to develop and expand markets globally. We expect to continue to execute across multiple dimensions of our business And capitalize on favorable end market dynamics for the foreseeable future. Now, I'll hand things over to the operator to open the line for your questions. Operator?

Operator

Frank. In the interest of time, we ask that you limit yourself to one question and then queue up again with any follow ups. Your line will be muted when you complete your question. When posing your question, please pick up your handset to allow for optimal sound quality. Our first question is coming from Erin Wright of Morgan Stanley.

Speaker 4

Great. Thanks for taking my questions. I have one on companion animal trends that I have to ask here. What are you seeing at the clinic level? If you could parse out a little bit more of what you're seeing The U.

Speaker 4

S. And international in terms of demand trends, what you're seeing in terms of capacity constraints at the vet clinic level and what is implied in your guidance at this Point in terms of operational growth across the Companion Animal segment. And then a follow-up on Triologous, Where do you stand now in terms of market shares and market share in canine parasiticides at this point? And how much do you think Simparica Trio is taking share versus expanding the market with greater compliance. Thanks.

Speaker 2

Hey, Erin, it's Kristen. Great to hear from you. So We fundamentally and structurally believe the pet care industry is in great shape. I think if you've seen some of these trends over the last few years, there's a very high standard of care. The demographics of who is adopting these pets over the last few years, being millennials, the number of pets you have out there and honestly the aging of pets.

Speaker 2

So we do not think there is a demand problem. I think you saw in the quarter potentially a difficult comp to what you saw last year. And if you look overall, a 5% increase at the vet clinic, there was a little bit less traffic as you referenced. I think those are some of those shorter term capacity constraints. But remember, we've got a lot more pets.

Speaker 2

So you're really the base is much larger than it's historically been. But given Omnicom, there was definitely some challenges at some of the vet clinics. But the other thing to consider about the data that we would just highlight is that it really pulls out a lot of the large corporates Who have found more innovative ways to structure their business to add more capacity and I think you'll see more of that coming overall there with the short term labor shortages. The other thing to really focus on we would say is if you look at Zoetis' Business, it's a little different, the nature of our business and our innovation. We have a lot of chronic medications.

Speaker 2

It doesn't require tons of visits. So we Focus a little bit more on the spend per visit. As we look at it, we also have alternative channels, which for us in the quarter grew 34%. So, We remain very optimistic with regards to pet care trends overall. And maybe Weta, you can take her second question on Simparica.

Speaker 3

Yes, sure, Aaron. Look, I'm very, very pleased with the performance of Simparica Trio, posting $164,000,000 of revenue in the quarter, up 83%, became the number one canine parasiticide in the U. S. And as we've shared before, we have 90% penetration across large corporate accounts, etcetera. And within those penetrated clinics, we continue to take share as well.

Speaker 3

Satisfaction level with our product He's about 90% among pet owners and we also just launched, Sempergastrio in Japan, which is a key heartworm Market as well, just in the middle of this quarter. So very pleased with the performance of the Treo.

Operator

Our next question comes from Christine Raines, William Blair.

Speaker 5

Hi, thanks for the question. I was just,

Speaker 4

wondering if I could

Speaker 5

have an update on Diagnostics Contribution to the quarter and overall performance. Is growth tracking with your expectations? And can you comment on system placements versus Testing volume growth, and if you would have made any additional reference lab purchases. Thank you.

Speaker 3

Yes, sure. I'll take this, Christine. Thanks for the question. Look, we're very pleased with the performance of our diagnostics business in the quarter. We grew 12%, posting $98,000,000 of revenue.

Speaker 3

We really saw strong growth across both U. S. And international, both replacements as well as consumables. So we're very pleased with the performance of the business. In terms of ReferenceLab acquisitions, we did not have any in the quarter.

Speaker 3

Obviously, we made a number of acquisitions that we in the U. S. And continue to make investments across technology. You might have seen images for example, we've added additional indications here with blood smear In addition to fecal and digital cytology, so we continue to be very pleased with the performance of the business.

Operator

Our next question comes from Louise Chen of Cantor.

Speaker 2

Hi, congratulations on the quarter and thanks for taking my question. Just curious what has been the impact of inflation On your Animal Health business, both companion and livestock, and how do you see potential increase in inflation or continued inflation impacting your business going forward? Thank you. Thanks, Louise. I'll start and then, I'll move it to Watney.

Speaker 2

We've seen historically that pet owner spending has been incredibly durable. Right now, we've got about 63% of our revenue in companion animal. You sometimes can see a little more impact from inflation on the livestock side. But if you look at the HABRI research, 86% of pet owners would spend whatever it takes. So we do see inflation and Whitney can certainly get into How we've taken price, etcetera.

Speaker 2

But I think we've obviously seen increase in labor costs and freight and fuel, but Wendy can really talk about the fact that we've been able to leverage price, especially in our Companion Animal business. So Wendy, do you want to go over some of those numbers?

Speaker 3

Yes, sure. Given we We continue to see very strong underlying demand from pet owners. We have very innovative products across our portfolio. We've been able to demonstrate that we can take price at or above inflation levels in the past and we don't see any reason why we wouldn't do that now. If you look at this quarter for example, our total growth included 3% of price.

Speaker 3

Now if you parse that out and you look at just companion animal globally, we took 6% of price. And so we'll continue to use that lever As we proceed, but given the dynamics, Kristen just mentioned underlying strength in the market, we will continue to have that availability to us.

Speaker 2

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

Operator

Our next question comes from Nathan Rich of Goldman Sachs.

Speaker 6

Hi, good morning. Thanks for the questions. Kristen, I'd be curious to get your view, following up on the commentary you have on just Vet visit trends and vet spending trends. Do you see more variability in Sales for your products that are administered need to be administered by the vet. And can you just remind us how big of a percentage of your companion animal business That is.

Speaker 6

And then a quick follow-up for wetany. It looks like the revenue guidance came down by 100,000,000 It looks like operating profits may be down by $50,000,000 So it seems like a high decremental margin on the revenue reduction. I guess, does that just reflect kind of the composition of the expense base? Just to be curious kind of any color you can shed on that dynamic? Thank you.

Speaker 2

Sure. I'll start on your first question. Again, if you look at our overall portfolio and the nature of our business, I think the level of innovation, We're not as susceptible to vet visit trends. You basically go at what percentage have to be administered in the vet clinic. I don't know, maybe around 50%, that would be vaccines, injectables.

Speaker 2

But I think if you look at the sales of, you know, Libriella being now the number one Pain product in Europe, clearly for things that are really important to pet owners, they are getting into the clinic. Regular checks for vaccines, we're not any significant negative trends there. So I think chronic medications, which is a huge part of our business and as you look at dermatology and parasiticides, Which are growing at, Pareas are growing at 25% in the quarter, derm at 28% in the quarter. We're clearly not really suffering from The slight decline in the U. S.

Speaker 2

In vet visit trends, but maybe Wenyi, you can take that second question.

Speaker 3

Yes, sure. As we've said, we've revised our guidance Solely to reflect FX, we continue to maintain our operational guidance range both top and bottom for the company that we came into in February that we gave. So from an FX perspective, top line impact was about 3%. It's about $260,000,000 of an impact. And as you referenced, the change you're reflecting the change in FX has a wider impact on the bottom and that's really largely driven by FX gains and losses Given our exposure across certain currencies, particularly the euro, if you look at the Q1, for example, you see a wider impact at the bottom than you see At the top, driven by the impact of that as well.

Operator

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

Speaker 7

Hey guys, thanks for taking the question and congrats on the strong result. I want to start with livestock markets. I mean, we've known livestock was going to be weak for a while. And so it's not a huge surprise, but still just want to get an update on how you're seeing a couple of factors there going both Draxin, Are you still sort of projecting, lapping the tough comps around the summer and sort of what are your expectations for Draxin exiting this year and next year? And then broader conditions such as drought in the Midwest and the United States, rising input costs, Sort of how do you see that playing out for U.

Speaker 7

S. Livestock and internationally? And then a follow-up question for Rodney, if I might. You guys touched on a number of times in the prepared remarks on field force expansions or investing in growth, investing in the opportunities in companion animal. Just wondering if you could go into a little bit more detail on how that's going to play out?

Speaker 7

When do you see that showing up in the numbers? When do you You'll start seeing the payoff for that and just sort of talk about labor pressures, wage pressures, how that affects your thought process there? Thanks.

Speaker 2

Great. Mike, I'll take the first part of you, which is the broader livestock trends and then what you can take the Draxen and the field force question that you've got. Look, as you know well, historically livestock has grown around 4%. I think if you look at 2019 and 2020, you saw sort of some unusual events that affected overall industry livestock growth. Obviously, African swine fever in China, as you remember, And then overall COVID.

Speaker 2

But then as I think as you look at 2021 2022, Zoetis has been unusually impacted and that has everything to do with where Draxen is. And Whitney can get into the numbers, but that has played out exactly how we expected it to. Our long term outlook, as Whitney mentioned a few minutes ago in his prepared remarks, Remains unchanged. We think you're going to start to go back to more normalized growth in 2023 and beyond, basically because feeding the world is Full trend, the desire for protein and higher quality protein. But let me let, Whitney get into some of the specifics on the Jackson numbers And then your second question.

Speaker 3

Yes. So as we said from the very beginning with respect to Jackson, we expect it to have about a 20% impact to the top line in the 1st year, Another 20% in the second. So what we're seeing across livestock right now is playing out exactly as we thought. In fact, in 2021, We did a little bit slightly better than that with respect to Jackson and we continue to have the effects, positive effects of lifecycle innovation like Jackson KP We're maintaining most of our volume and the margins for Jackson remain very attractive for us as well. So as we expected, we've seen competitors come in, But the performance has been at or slightly better than we expected.

Speaker 3

Broadly speaking, I think if you look at swine, for example, in China, that was a pretty significant effect impact on the quarter with respect to Livestock, again, we expected that coming in and it's really looking at where swine prices are in China versus a year ago Where they were at all time highs and have been at all time lows essentially here and the lockdowns having an impact on sort of demand and consumption as well in this case. So with respect to the field force, if I can transition to that part of your question, very pleased to be able To expand our field force here, we have the broadest portfolio across the market. And if you look at innovation that we have coming As well with respect to the pain franchises for ZOLENTIA that we are partly launching across the second half of this year and as we get approval for For Lubrela and LaunchDAD as well in the U. S, we continue to have opportunities to really capitalize on the market dynamics and the strong demand that we see And have additional field force, which we see a strong return on those as well. We're also launching a dedicated field force for diagnostics separate and apart from our Rx Teams which we believe will have again a very positive return for us as well.

Speaker 3

Now you can see that with those plans, we still have on operational and levered P and L where we're growing the bottom line above the top line. So top line at 9% to 11% and the bottom at 10% to 13% With approximately 40% increase in our field force.

Operator

Our next question comes from Jon Block of Stifel.

Speaker 8

Great. Hey, guys. Good morning. Maybe just a couple of quick ones. For U.

Speaker 8

S. LIBRELLA approval, Was that a slight push, Christian, to year end 2022 for mid-twenty 2? If it was, maybe just if you could elaborate on what still needs to get done there for Approval and if it is year end 2022, how are you from a supply standpoint? Do you think that product will be ready for early 20 23 U. S.

Speaker 8

Launch. And then maybe just as a quick follow-up. Whitney, can you talk about the supply chain and cost and how you feel there? Companion animals expected to be a big year over year in 2022. So you've got this positive mix shift.

Speaker 8

You've got price running ahead of what it normally does. I think you called out 3% versus 1% last year. And GM is still expected to be flattish. Just would love some color on how you're feeling in the supply chain. Thanks.

Speaker 2

Sure. Thanks, John. I'll start with the first question and let Whitney take the second. With regards to Lovela, no, this is exactly as we expected. We were expecting an approval later this year.

Speaker 2

We continue to expect that. As we wrote in the remarks, there's no change there. We still require an ex U. S. Site visit as we said, all along.

Speaker 2

So I would say there's really no update there. And to your second question, when would you expect a launch? We're obviously, as we would in any product working to build up supply. But as always in our industry And especially with regards to biologics and monoclonal antibodies, the standard in our industry is it takes somewhere between 3 9 months to get up to a full launch. So I think we should expect next year as well obviously similar to what we've done for every other product is monoclonal antibody.

Speaker 2

We'll do an early experience sometime in the first half again depending on where the approval is and a launch shortly thereafter. We're quite excited about this. Obviously, we're working hard to build up that supply as soon as we The approvals of the site, etcetera. So everything on Libriella is exactly where we were before, really absolutely no change there.

Speaker 3

Yes. And I'll take the supply chain part of the question, John. Look, our supply chain has proven to be very resilient despite Challenging elements over the last couple of years. We delivered 15% operational growth last year with 14% of that being volume. So We've proven our ability to continue to navigate through those.

Speaker 3

Currently, we are looking at China, for example, where the lockdowns Have had an effect certainly in our Q1 and we see that in our Q2 as well, which is why we included those in our prepared commentary around Q2 expectations. But in terms of price, we are pulling that leverage, saw 3% total for the company. On the companion animal side, which now is about 63% of our Company, if you look at the Q1, companion animal has grown almost 50% over the last 2 years if you look back to 2019 level. So Again, it's very strong market dynamics and demand. We do see the mix shift being very positive for us with more companion animal With our innovative products that are launching as well, but we do have some offsets when you look at livestock, particularly Draxin, as we just talked about in line with our expectations, But certainly are giving price and maintaining the volume and as I said still at attractive margins for us, but that's really the main offset if you look at it across the year.

Operator

Our next question comes from Balaji Prasad of Barclays.

Speaker 9

Hi, good morning and thanks for the questions. One each on companion and livestock. Firstly, on atopic dermatitis, I estimate that you currently probably are around 35% of the market share in the U. S. Between Cytopoint and Evercore.

Speaker 9

So with the what percent of the incremental market is allergic dermatitis? And is this market open for you as you get the label extension? On the same subject, do you also have an update on your oral JAK inhibitors and which is expected to come later this Sure, how that would influence the market share, iftar. On the livestock side, could you quantify if there are any opportunities that are coming to you through The Chinese consumption shifting towards beef and poultry, will it be swine, or is there not much of a trend there? Thanks.

Speaker 2

Sure. I'll start on the overall derm. As you saw, it grew about 28% in the quarter, driven by expanding our direct Consumer efforts, certainly you see we're investing more in our field force, pet care rewards. And I also think genuinely it's just more people, home with their pets. I don't have the specific share numbers.

Speaker 2

We can certainly get back to you on that. I think it's over 70% in the U. S, our share of the atopic dermatitis, allergic dermatitis Markets overall in the U. S. And especially even it's even more if you want to look at revenue.

Speaker 2

But we're really pleased with where that's going. With regards to competition, I know our favorite question, we don't absolutely know. We would expect competition on this. At this point in time, as we look at 2022, we are not expecting competition in 2022. We would expect it in 2023 as our latest intelligence.

Speaker 2

Obviously, We could be wrong there, but our current expectation is competition for derm on a small molecule basis will come in 2023. With regards to our own pipeline internally, we don't discuss that. So I don't think we have any color there. But I don't know, Puneet, do you want to take the second question?

Speaker 3

Yes, sure. Just one thing to add on First one, for us really when we look at derm, it's less about market share. It's a lot more about market expansion. There's certainly an opportunity Look at the number of dogs that suffer from itchiness that are not being treated, about 6,000,000 and of the 7.6 that are being treated, a good portion of them are under treated with either antihistamines or steroids. So we do think there's an opportunity with respect to the under treatment there.

Speaker 3

Now I'll shift over to your question around livestock, particularly around China. We have seen an increase in beef consumption here, which certainly benefits us when you look at our business in Brazil, for example, that exports into China from a beef perspective as well as in China Sort of activities and so it's still in terms of in China, it's still relatively small compared to swine for example, but we are seeing good trends there that are favorable to us.

Operator

Our next question comes from Chris Schott of JPMorgan.

Speaker 10

Great. Thanks so much for the questions. Just 2 for me. First, can you just remind us about your sensitivity to economic growth? I know you're seeing very healthy demand in Companion side right now and you've been able to take price.

Speaker 10

But if we enter a mild recession in some parts of the world, particularly Europe, what type of pressures would you anticipate, if any, to your business And my second one was on protein demand. I know you've touched on this in a couple of other questions, but it does seem like we're entering a kind of A challenging macro environment with food prices growing very rapidly, especially in the emerging markets. Do you see that as a risk at all in terms of Global protein demands and consumers trading down on protein that could kind of Dampen kind of your livestock recovery as we look out to kind of 2023 and beyond. Thanks so much.

Speaker 2

Sure. Thanks, Chris. Good to hear from you. As you think about the economic challenges, potential economic risks across the globe, I think one thing you've seen about the animal health industry as I was referencing before, The research is 86% will spend what it takes. And I think it's also really important to focus on the fact that Our companion animal business is 50 is growing 50% between 2019 2021.

Speaker 2

As Whitney mentioned, it was about 63% And that is just a more durable business, as you think about getting through economic challenges. We grew through the beginning of COVID, for example. As you look at it, we've grown during the Great Recession and that was when our Companion Animal business was only 35%. So I think structurally, if you look at our business, it's more positive now than it was during the great recession. So I do think we're going to be pretty resilient as we go through those times.

Speaker 2

But I'll let, Wettie add anything there if he wants to and then take your protein demand trend question.

Speaker 3

Yes. I think you covered it well. Just a companion animal, it's a bigger percentage of our business now. It's proven to be very resilient. And structurally, with respect to demographics, We have more Gen Z and millennials owning pets, more pets.

Speaker 3

And if you look across our portfolio, a number of chronic conditions that we're treating That are very resilient, even as we've seen in the past and structurally even stronger now. With respect to livestock, You do see the potential for people to trade down in proteins going from beef down to chicken or pork and then Etcetera. So we do think that can happen in terms of looking across the globe. We do have a portfolio across Different species obviously, but that is one of the areas that we think is a little bit less than what we see in companion animal where it's Extremely resilient. Now we do overall though when you look at protein consumption, we do see that growing over time, particularly as you could look across emerging markets, Growing populations, increase in sort of disposable income, etcetera, and growing middle class Across different markets, we'd see those continuing to maintain growth with respect to protein consumption.

Speaker 3

We do have the pandemic, which Actually has been negative from a livestock perspective. I think, folks look at the pandemic and think about the positive effects on the companion animal side, But that has actually been largely negative. And so we do believe that they'll in addition to our Jackson, which we've talked about, We do anticipate a return to growth in livestock as we get out into 2023, 2024 timeframe.

Operator

Our next question comes from Steve Scala of Cowen.

Speaker 11

Thank you. You mentioned enhanced spending per pet. Our understanding Is that this is due to 2 things, enhanced compliance and catch up in routine wellness checks. Is that what you've seen? If so, how much does each contribute?

Speaker 11

So how much does enhanced compliance contribute versus catch up and routine visits? The concern is that the catch up and routine visits would seem like a one time boost. And if that's the case, then what are the long term implications of not No longer getting that boost and just enjoying the trends of the enhanced compliance.

Speaker 2

Sure. I mean, I guess What we would say is that you're seeing more animals, you're seeing that, Whitney has mentioned the demographics of who is adopting these animals, people who spend more time, more money on them, the aging of pets. So I'm not sure we would probably parse the data the way you do to be perfectly honest. Obviously, we are Increased compliance, I think alternative channels, sort of online and auto ship even from clinics is really helping driving that increased compliance. But I would say if you look at our portfolio, it's innovation.

Speaker 2

It's bringing disruptive innovation that people are excited about. Looking at Para's, a single product That does three things. People are excited about. You look at monoclonal antibodies, you look at dermatology, we have great chronic medications that are not as susceptible To how many visits you make, if you get a prescription prepared, it lasts a year. So I guess we would look at the data slightly differently than what you're looking at it.

Speaker 2

And more importantly, For our business, we think the nature of our business and the level of innovation and the demographics of both the number of animals and who's adopting them remains very positive.

Speaker 3

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

Operator

Our next question comes from Elliot Wilbur of Raymond James.

Speaker 12

Thanks. Good morning. I wanted to ask one question around the EU launch experience and dynamic to date with respect to Librella and ZILENSIA, just how some of the early experience is Shaping expectations for the U. S. Launch areas of over or underperformance Where you've been positively surprised and just thinking about dynamics such as persistence, do you have any sense of The number of patients started on therapy that are returning for follow-up injections, Labrela's share of new patient starts and I know it's still relatively early, but Is or are you seeing or are you expecting to see an increase in overall Patient volumes from the launch of these products that in just as a quick follow-up here, how important Was or is the mAb opportunity in the U.

Speaker 12

S. In terms of driving your decision behind the sales force expansion? Thanks.

Speaker 2

Sure. Thanks, Elliot. Great questions on Librela. We are super excited at the launch there. To get to some of the specific information you asked for us, as we said, This is now, Librella in Europe is now the number one selling product for pain.

Speaker 2

What's really exciting also about that is 40% our patients that are new to the category. So I think this is really changing the game for a lot of people maybe for safety reasons couldn't take what the other products were, are really coming into the vet clinic. And to get to your other question, there's a 90% reorder rate. So which gets that, if you come in for one injection, are you staying with the product? The answer is yes.

Speaker 2

And this is why we believe in its 1st full year in Europe alone, Librella will be a blockbuster product for us. We did about $22,000,000 in Q1. This definitely does inform as we think about a U. S. Launch.

Speaker 2

It informs why we want to start with early experience getting each of the vets, especially the KOLs used to what it looks like, how to treat, How to manage it, and then really building that excitement, which worked incredibly well for us in Europe, which we'll do again, in the U. S. And really I think our expectations for the product has increased based on the success we've seen already. Celestia, we're very excited as well. It's a very different market.

Speaker 2

It didn't Just before, as we've talked about, we're really creating a market. Zoetis has demonstrated time and again, its ability to do that as it did in derm. But again, you've got to get the cats to the clinic because you know they're less medicalized than dogs. You've got to help cat owners know what pain looks like, But we remain super excited about Valencia. It will just be as we said, the ramp will look slightly different on Valencia than it does with LoBrella, But we're just as excited and we think its potential is very strong there.

Speaker 2

Do you want to add anything, Whitney?

Speaker 3

No, just part of the question on the field force, I wanted to Yes. I'll comment on which is, look, we have the broadest portfolio as I mentioned before and we continue to add innovative products Sue, that and so we carefully analyzed sort of the coverage across clinics and across products of our field force. And I'm very confident that this is an investment that's going to have that's going to yield positive returns for us across our product fleet, existing products,

Operator

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

Speaker 2

Great. Thank you all for your questions and for the continued interest in Zoetis. I just want to summarize, I think Zoetis is off to a strong start of the year. We've got continued strength in products for pet care. And I think as you've seen a diverse and durable global portfolio, we're really Happy to be maintaining our operational growth expectations for the full year despite the negative impact of foreign exchange and other headwinds And we're continuing to make ongoing investments in talent and technology, manufacturing expansions and innovation that have us well positioned to support our future growth plans as well.

Speaker 2

So I look forward to keeping you updated on future calls and hope you have a great day. Thanks so much everybody.

Operator

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

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Zoetis Q1 2022
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