Arko Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2021

There are 12 speakers on the call.

Operator

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 made available approximately 2 hours after the conclusion of the call via dial in or on the Investor Relations section of zoetis.com. At this time, all participants have been placed in a listen only mode and the floor will be open for your If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. In the interest of time, we ask that you limit yourself to one question and then queue up again with any follow-up. Your line will be muted when you complete your question.

Operator

When posing your question, please It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Speaker 1

Thank you. Morning, everyone, and welcome to the Zoetis Second Quarter 2021 Earnings Call. I am joined today by Kristin Peck, our Chief Executive Officer and by 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 in the company's 8 ks filing dated today, Thursday, August 5, 2021. 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 good morning, everyone. I hope junior loved ones are all healthy and getting vaccinated for COVID-nineteen. I'd like to start the call by welcoming our new Chief Financial Officer, Wettene Joseph, Who is joining me on the call today. As the former CFO of Catalent, Whitney is a veteran of the biopharma industry and very familiar with many of you in the investment community. Whitney joined us on June 1 and is off to a fast start, Learning all about the company and animal health, everything from cattle runs and drought impacts to pet care trends and parasiticide season.

Speaker 2

I'm confident that Whitney will make strong contribution to our ongoing market performance, value creation, and leadership in animal health. I also want to take a moment to thank Glenn David for his partnership and all of his contributions to Zoetis as CFO over the last 5 years. Glenn has taken on a new role overseeing our international operations and other business units, including Farback, Bio Devices, and Pumpkin Pet Insurance. I know he will bring his signature leadership qualities, business skills and industry knowledge to this role and continue driving profitable growth in these areas. Now turning to the Q2.

Speaker 2

We achieved strong results once again with 22% operational growth in revenue and 28% operational growth in adjusted net income. Our companion animal portfolio generated 36% Operational revenue growth driven by our pet care parasiticides, key dermatology products, vaccines and diagnostics. Meanwhile, Livestock product sales were up 3% operationally and remain in line with our expectations for more moderate growth this year. The Q2 results also reflected favorable comparisons to last year's Q2 when the uncertainty of COVID-nineteen and related lockdowns We're most severely felt across the animal health industry. We are raising full year guidance for revenue and adjusted net income again this quarter to reflect our first half performance and confidence in the underlying growth drivers of our business.

Speaker 2

We remain on track for a very strong year And continue to focus on sustaining our investment in long term growth opportunities. With a strong cash flow and positive outlook, we are investing internally and externally in innovative new products, market expansion plans, and direct to consumer promotions that will support future growth. Our team has been delivering strong growth based on internally developed companion animal parasiticides, led by our Simparica, Pro Heart, And Revolution Plus franchises. We've redefined care for the dermatology category with our development of Apoquel and Cytopoint, And we see more growth potential coming from our monoclonal antibodies for osteoarthritis pain, new vector vaccines for poultry, and the industry's 1st, cloud based diagnostic platform with AI capabilities. In terms of our monoclonal antibodies for alleviation of OA pain in dogs and cats, We continue to anticipate U.

Speaker 2

S. Approval for La Brella and Valencia in 2022. Meanwhile, Initial customer response from best and pet owners in Europe has been excellent, and we recently received approval of Silencia in Canada. I always say with great pride that we have the best field force in the animal health industry, and we will continue to expand their scope, effectiveness, and digital tools in ways that can enhance our customers' experience and support our growth objectives. We've also seen a positive return on our investment And direct to consumer promotions for Simparica, Apoquel and disease awareness over the years.

Speaker 2

And DTC remains an area of ongoing investment to support our parasiticides and dermatology portfolios. And finally, we continue to look externally for business development opportunities That can complement our portfolio and expand our market presence for capabilities. Yesterday, we announced plans to acquire Gerox, A privately held animal health company Based in Australia, expected to close in the first half of twenty twenty two, the acquisition will provide us with growth opportunities, Manufacturing capacity and increased capabilities in Australia, our 5th largest market, and also bring us a range of companion animal and live As I wrap up my remarks, our growth story for this year remains very consistent Based on 3 recurring catalysts. First, our companion animal portfolio, driven by our triple combinations in Paracatrio and other parasiticides Our dermatology treatments Apoquel and Cytopoint, new monoclonal antibodies for pain, and our VetScan diagnostic systems. The entire portfolio is benefiting from strong pet care trends in terms of increasing clinic visits, rising spend per visit, and a focus on diagnostics Specialty care, especially among newer and younger generations of pet owners.

Speaker 2

Recent estimates for market growth in companion animal products are in the high single digits, And Zoetis continues to expect to grow faster than the market. We're gaining share in the approximately $5,000,000,000 Global parasiticides market for pets, and we're excited by veterinarian and pet owner responses to our new monoclonal antibodies for pain. We also continue to see progress in the early launch of VESTCAN images, which leads to our second catalyst for growth, Diagnostics, which posted 38 percent operational revenue growth in the second quarter as access to vet clinics in the U. S. Rebounded from the year ago quarter.

Speaker 2

Our 3rd growth catalyst is international, where we continue to generate strong operational growth, driven by China and Brazil, which grew at 30% 40%, respectively. All our catalysts for growth are buoyed You can read more about our progress on these ESG goals and our first sustainability report, which was published in June. In closing, We had a great Q2, and we're focused on delivering a record setting year. The market dynamics in animal health remain strong, steady and resilient, even during the challenging times, based on people's unbreakable bond with animals. For the remainder of the year, our diverse portfolio, innovative pet care products, strength in diagnostics and expansion in international markets will continue driving our performance.

Speaker 2

Now let me hand things off to Whitney. Thank you, Kristen,

Speaker 3

And good morning, everyone. Before I discuss our 2nd quarter performance, I would like to take a moment to express how excited I am to join Zoetis, A company with an exceptional opportunity for meaningful long term growth, driven by the durability and resiliency of the existing portfolio, a robust product pipeline And a keen focus on future innovation. I look forward to leading an outstanding financial organization and maintaining the financial principles and investment the investment community for such a warm and gracious welcome. I had the pleasure of speaking with several of our investors since becoming CFO, and I look forward to connecting with many more in the coming weeks. Now shifting focus to earnings.

Speaker 3

This morning, I will provide commentary on our Q2 financial results, contributing factors to our performance and an update on our improved full year of 2021 guidance. In the Q2, we generated revenue of $1,900,000,000 Growing 26% on a reported basis and 22% operationally. Adjusted net income of $566,000,000 was an increase of 33% on a reported basis and 28% operationally. Operational revenue grew 22% With 2% from price and 20% from volume. Volume growth includes 12% from other in line products, 6% from new products and 2% We delivered another strong quarter and remain encouraged by the performance of our business, Health of the overall industry and our outlook for the future.

Speaker 3

It is worth noting that Q2 2020 is a favorable comparative period due to the impact of COVID-nineteen. The pandemic caused widespread uncertainty last year, which led to clinic closures, supply chain disruptions and shifts in Consumer demand from restaurant and food service to grocery stores. This materially impacted several aspects of our companion animal and livestock businesses. Now let's dive further into the details of the quarter. Companion animal products led the way in terms of species growth, Growing 36% operation only with livestock growing 3% operationally in the quarter.

Speaker 3

Performance in companion animal was again driven by our parasitic portfolio led by sales of Simparica Trio and with significant contributions from the broader portfolio. We also continue to see growth in our key dermatology products, Apoquel and Cytopoint as well as in vaccines and diagnostics. Simparica Trio has continued to perform exceptionally well, Posting revenue of $139,000,000 representing growth of more than 200% versus the comparable 2020 period. In addition to sales, we are exceeding our other performance managers as well, such as clinic penetration, share within penetrated clinics and reordering rates. The strength of our entire companion animal parasiticide portfolio was evident again this quarter, growing 50% operationally, with meaningful growth in the Core Heart and Revolution Stronghold franchises in addition to the Simparica franchise.

Speaker 3

Having the broadest and most innovative portfolio within a large and expanding therapeutic area This is bullish on future growth in parasiticides. Global sales of our key dermatology portfolio were $280,000,000 in the quarter, Growing 22 percent operationally. CYTOPOINT had a particularly strong quarter, growing 42% operationally And generating quarterly revenue of $100,000,000 for the first time since launch. Year to date sales for key dermatology products are $524,000,000 and our view remains unchanged that sales will exceed 1,000,000,000 And instrument revenue as the business with our sustained investments in diagnostics, the new technology we are bringing to the market the ability to leverage the breadth of our medicines and vaccines portfolio, we are well positioned to grow faster than the diagnostics market, which is expected to grow double digits and outpace the overall animal health market. Livestock growth in the quarter was driven by Our cattle and swine businesses.

Speaker 3

Cattle grew 3% and swine grew 6% operationally Despite price reductions as part of our generic defense strategy and higher input costs weighing on producer profitability in the U. S. Data suggests the food service and restaurant industries continued to recover in the Q2, which is a crucial dynamic for demand of our premium products. Poultry was the only species to decline in the quarter, which fell 4% as producers in the U. S.

Speaker 3

Extended their use of lower cost alternatives to our products. The decline in poultry partially offset the growth in cattle, swine and fish products. Now let's discuss the revenue growth segment for the quarter. U. S.

Speaker 3

Revenue grew 22% with sales of companion animal products growing 34% and livestock product sales Declining 8%. U. S. Quarterly revenue exceeded $1,000,000,000 for the first time in company history. For Companion Animal, pet ownership and pet spending trends remain robust.

Speaker 3

Pet clinic revenue increased double digits in the quarter and patient visits and And per visits were up as well. While we expect some of the trends to moderate, our view is they will remain above pre COVID-nineteen levels. A meaningful portion of pet acquisitions, which occurred during the pandemic were by millennials and Gen Z. This infuses a solid foundation of younger pet ownership who are willing to spend disproportionately more on all aspects of pet care than prior generations and will be a key growth driver for companion animal medicines, vaccines and diagnostics moving forward. Our companion animal Our FinTech portfolio was the largest contributor to companion animal growth in the U.

Speaker 3

S, growing 59% in the quarter. He's dermatology products, Vaccines and diagnostics also contributed to growth. Simparica Trio had an incredibly strong quarter in the U. S. With sales of $120,000,000 Generating the highest revenue by a single product in the U.

Speaker 3

S. For Q2. The Simparica franchise generated sales of $153,000,000 Growing 96% and remained the number 2 brand in the U. S. Fleet tick and hardware market.

Speaker 3

Key dermatology sales were $197,000,000 for the quarter, growing 23% with significant growth for Apoquel and Tytopoint. Diagnostics sales increased 22% in the quarter with growth in instruments, rapid tests, point of care consumables and reference lab revenue. US Livestock sales fell 8% in the quarter, driven by declines in cattle and poultry with swine essentially flat for the quarter. Q2 cattle sales were negatively impacted by a promotional program in the Q1 of this year, which pulled forward a portion of 2nd quarter sales. In addition, price reductions as part of our generic defense strategy and higher input costs weighing on beef and dairy end markets presented Challenges to our cattle business this quarter.

Speaker 3

Upholstery declined in the quarter as producers expanded use of lower cost alternatives to our premium products as a result of higher feed costs and labor wages and smaller flock sizes reducing disease pressure. We also face generic competition for Zoamix, Our alternative to antibiotics and medicated feed additives. To summarize, our U. S. Operations delivered another strong Order led by our innovative and robust companion animal portfolio.

Speaker 3

The end market dynamics for companion animal remain extremely healthy With pet ownership and pet spending trends driving an environment conducive to sustainable future growth, which is expected to more than offset the near term weaknesses U. S. Livestock Business. Now turning to our international segment. Revenue in our international segment also grew 22% operationally in the quarter, with Comparing Animal revenue growing 41% And livestock revenue growing 10% operationally.

Speaker 3

The trends fueling strength in our international companion animal business are very similar to those in the U. S. The increasing medicalization rates and standard of care by pet owners, coupled with significant investments in advertising and promotion to support new product launches and key brands, Show growth across our parasiticides, vaccines, diagnostics and key dermatology portfolios. 106% operationally in the quarter with consumables and instrument revenue each exceeding 100% operational growth. Librela, our monoclonal antibody for alleviation of OA pain in dogs launched in the EU in the Q2.

Speaker 3

Feedback from the early experience trials in Q1 was encouraging And 2nd quarter sales exceeded our expectations, further supporting our optimism on the long term blockbuster potential of the product as well as monoclonal antibodies as Our feline monoclonal antibody for alleviation of OA pain, ZOLENZIA, Begin early experience programs in the Q2 with an EU launch following in Q3. As previously mentioned, OIF in cats is a significant unmet need in animal health, and we're excited to provide pet owners with a novel product in a space that has previously lacked Innovation. Meanwhile, our international livestock business had its second consecutive quarter With growth across all species, led by strong operational growth in cattle and swine. Cattle growth in the quarter was driven by marketing campaigns, Key account penetration and favorable export market conditions in Brazil and several other emerging markets. Revenue growth in swine is largely distributed to China, which grew 38% operationally.

Speaker 3

The themes for growth in swine remain consistent with previous quarters As large key accounts increase their use of our vaccines and other products as they continue to expand production as the market shifts from smaller farms to larger scale modern operations. Our official portfolio continues to perform very well, growing 25% operationally. Growth was driven by strong performance of Afaflux in Chile, vaccine volume in Norway, and the 2020 acquisition of Fishweck Group. From a market perspective lens, all major markets grew double digits in the 2nd quarter with the expansion of demand, which declined slightly in Q2. China and Brazil had strong quarters growing 30% 40% respectively on an operational basis.

Speaker 3

Growth in companion animal across Emerging markets remains a key driver of our international business. And in addition to the growth in China and Brazil, our other emerging markets Companion animal business grew 68% operationally. Overall, our international segment delivered strong results, Demonstrating the importance of our diversity across species and geography. The livestock business continues to perform well and increasing pet acquisitions and pet care spending Adjusted gross margins of 70% is essentially flat on a reported basis compared to the prior year as favorable product mix And price were offset by higher manufacturing costs and freight. Adjusted operating expenses increased 23% operationally, Resolving from increased compensation related costs, advertising and promotion expense and freight.

Speaker 3

The adjusted effective tax rate for the quarter was 20%, A decrease of 2 30 basis points, driven by the favorable impact of jurisdictional mix of earnings, lower guilty tax And an increase in favorable discrete items compared to the prior year's comparable quarter. Adjusted net income and adjusted Diluted EPS grew 28% operationally for the quarter, primarily driven by revenue growth. We remain in a very strong liquidity position And continues our share buyback program, repurchasing approximately $165,000,000 worth of shares in the quarter. The strength of our balance sheet And substantial free cash flow generation allows us to make significant investments for future growth while still returning excess cash to shareholders. Before I review our updated guidance, I would like to reiterate a point that has been discussed on prior earnings calls, which is that we expect growth Moderate in the second half of the year as a result of varying comparative periods where pent up demand created by COVID-nineteen in the first half of twenty twenty Worked its way through the system in the second half of the year, in addition to the expected increased generic competition for Jackson.

Speaker 3

Adjusting for the variability in the comparative period due to the pandemic, our phasing of top line growth would be more normalized and consistent quarter to quarter throughout this year. Now moving on to our updated guidance for 2021, which we are raising and narrowing as a result of our quarter performance, strength of our product portfolio and favorable market dynamics, which we expect to continue. Please note that our guidance reflects foreign exchange rates as of mid July. For revenue, we are raising and narrowing our guidance With projected revenue now between $7,625,000,000 $7,700,000,000 and operational revenue growth between 12.5% and 13.5% for the full year versus the 10.5% to 12% in our May guidance. Adjusted SG and A expense for the year are expected to be between $1,870,000,000 $1,910,000,000 versus $1,820,000,000 $1,870,000,000 in our prior guidance.

Speaker 3

The increased spend represents additional advertising and promotion investments, A significant portion of which will occur in the Q3 as well as compensation related costs due to company performance. Adjusted net income is now expected to be in the range of $2,135,000,000 $2,175,000,000 representing operational growth of 13% 15% compared to our prior guidance of 12% to 14%. Adjusted diluted EPS not expected to be in the range of $4.47 to $4.65 and reported diluted EPS to be in the range of 4 dollars to $4.19 Now to summarize before we move on to Q and A. Our strong performance in the first half of twenty twenty one continues to underscore the value of our diversity, innovation and durable business model. We again raised and narrowed our full year 2021 guidance and expect to grow faster than the market.

Speaker 3

We continue to focus on long term sustained By investing in our pipeline, including infrastructure to support current and future product launches and remain very positive in our outlook for sustainable growth Beyond this year. Now I'll hand things over to the operator to open the line for your questions. Operator?

Operator

And we will take our first question from Michael Raskin with Bank of America.

Speaker 4

Thanks for taking the question as always and Congrats on another strong quarter. I want to start with Simparica Trio, just a really breakout quarter with 139,000,000 I mean, by our projections, something in the $450,000,000 to $500,000,000 range isn't out of the picture for the rest of the year. So I just want Get a better sense of where you're seeing that incremental growth coming from. I mean, we did note a little bit of a tick down in regular Simparica in the U. S.

Speaker 4

Year over year. So just wondering if you could comment a little bit again on cannibalization, just sort of your expectation as you move forward. And then my second question will be on the operating leverage.

Speaker 3

Something we've talked about

Speaker 4

in the past, but definitely saw a notable step up sequentially in SG and A coming in somewhat above my estimates. You mentioned a lot of advertising spend, a lot of competition related expenses. Could you just give us a sense of how much this is expected to persist going forward? Obviously, it's going to play a big role in the operating leverage in the second half of the year and the comps. I want to get a better sense of what goes into that $490,000,000 and sort of how to think about that.

Speaker 2

Great. Thanks, Mike. I'll take the first question and then I'll let Whitney take the second question on the leverage. Yes. Simparica and Simparica Trio did have a phenomenal quarter.

Speaker 2

Overall, as Whitney mentioned, we had 50% growth in parasiticides. But as you look at the quarter for Trio with $139,000,000 it was incredibly strong. And I would say Trio is and has been outpacing our expectations. In fact, the Simperica franchise in Q2 was the 2nd largest in the flea tick heartworm space. So we're very excited.

Speaker 2

We expect to continue to see this product grow. The market itself, as you know, is going to over $5,000,000,000 So We remain super excited. We're doing well both on our penetration of clinics as well as reorders. So we see strong momentum We think will continue into the second half of the year. So I'll let Whitney take your second question.

Speaker 3

Yes. In terms of SG and A, indeed, the step up that you see in terms of trend there is really largely driven by R and D Really largely what's driving it. In terms of compensation related costs, these are really more of variable compensation areas that

Operator

And we will take our next question from Jon Block with Stifel.

Speaker 5

Great. Thanks, guys. Good morning. Chris, maybe I'll start on the monoclonals, and I know it's early, but how are you seeing Librella being used in these international practices? In other words, is it market Expansion, is it taking share from other solutions or cannibalization or Rimadyl?

Speaker 5

Any color you have there would be helpful. And then just to shift gears on livestock, it's always choppy and can move around, but is there anything more structural going on in the U. S. Market In regard to generic competition and maybe on that last point, how is traction playing out? You mentioned it, it seems like maybe less impact to date, but is Well, your assumption is still unchanged.

Speaker 5

Thanks, guys.

Speaker 2

Sure. Thanks, John. Good to hear from you. I'll take the first question. I'll let Let me take the second question on livestock.

Speaker 2

We have been very excited at the uptick in LIBREXZA, as what we're seeing and your question about how is it really being used. We've seen really strong efficacy of the product. The feedback we've gotten through early experience in our Q1 of sales is just Really quick efficacy, so they're noticing differences pretty quick. It's improving quality of life, better sociability. So we really think more and more, vets are looking at this as a first line therapy.

Speaker 2

We do think that there's significant opportunities for Librella to grow the category. The dog categories we've talked about before currently is $400,000,000 But we believe by bringing this type of innovation to the market, So forwarding them globally, but bringing this type of innovation from the safety and efficacy profile, we think we have the ability to potentially double that market if you look at how many dogs there are, How many have OA and how many are treated. So we look at the opportunity to grow this market in a few ways. Certainly, as I talked about getting more animals, Getting more days on treatment and better compliance. And then certainly with prices, this product is priced at a premium to those that are already on the market.

Speaker 2

So, Whitney, do you want to take the second

Speaker 3

Yes, sure. Look, in terms of livestock, we don't see a structural change here in terms of your question. And the performance that we're seeing is right in line with our expectations. Lifestyle grew 3% on the quarter. And as we've said, Lifestyle has tend to grow somewhere around the 4% range.

Speaker 3

In the past, we expect to be in low single digits This year and really the global growth in that area driven by our international markets, particularly when you think about emerging markets like China In Brazil, etcetera, in the U. S. With the generic competition for Draxin, we expected to see some headwind there, And it's really playing out in line with our expectations. One more point I'll make is, if you recall, in Q1, we did have some Promotions, again, in line with our generic defense strategy, that really accelerated some of our revenue into Q1 from Q2. So that's playing out a little bit in terms of what you're seeing In the last stock figures for the U.

Speaker 3

S, but we expect to see further declines in terms of last stock for the remainder of the year and all that factored into the guidance that we raised today as well.

Operator

And we will take our next question from Louise Chen with Cantor.

Speaker 2

Hi, thanks for taking my question here. Just curious how durable you think this increase in vet visits plus spend per pet will be over the longer Thank you. Thanks, Louise. Great to hear from you. Yes, we're very confident in the durability of the companion animal trends That you've seen throughout 2020 2021.

Speaker 2

So as you look in the quarter, we saw overall clinic revenues up 14%, and that was equally split between vet visits and spend per visit. And our confidence in the overall trends really has to do with a few things. One, there are more pets. We've talked about that The other thing is it's an increase in the standard of care, the expectations of pet owners, greater use across the portfolio, greater use of diagnostics, More people home noticing more about their pets. But the other really important trend that's going to continue to play out is who's adopting a lot more of these pets.

Speaker 2

And that's a lot of millennials and Gen Z, and they tend to spend more on their pets. They're very engaged in their care. So we see these as durable trends that will continue and will remain a big growth

Operator

And we will take our next question from John Kreger with William Blair.

Speaker 6

Hi, thanks very much. I have a gross margin question. I realized the monoclonals are sort of a new class for you guys. As Solenci and Librello ramp, do you expect The gross margin on those products to be better or worse than what you see across your traditional product portfolio?

Speaker 3

Yes. John, look, we certainly given the safety and efficacy profile of these products, we expect them to be priced as significant premium to Existing therapies, including on Rimadyl. So I would say it would be above sort of our average gross margin that you see across our portfolio.

Speaker 6

Great. Thanks, Lenny.

Speaker 7

Thanks, Don.

Operator

And we will take our next question from Katie Trahan with Credit Suisse.

Speaker 8

Hi, thanks for taking my question. You highlighted the strength in diagnostics. Can you just speak about some of the advantages and success that you've had with bundling And can you speak to what you're seeing in terms of competitive placements for instruments? You also called out the new VetScan images I mean how has that been performing today and how do you expect that to contribute to growth in the business going forward? Thanks.

Speaker 2

Thanks, Katie. As we look at Diagnostics, it was a very strong quarter with 38% operational growth. Diagnostics, as we've talked about, remains Very attractive segment with double digit growth. And it really is core to the way the vet practice operates. Again, pets cannot Tell you exactly how they're feeling.

Speaker 2

So we continue to see this being a really strong part of our continuum of care strategy. It's critical to the vet practice. We did incredibly strong growth as you saw in the quarter in international, making significant placements very strong in the U. S. And we're focused on a few things there.

Speaker 2

Certainly, it's placements as we've talked about where we are seeing good growth there, stronger in the quarter in international than the U. S, But also really driving consumable use, and we think that remains a big opportunity for us versus competition, getting more consumable use in the placements that we have. And then really adding on to that, the innovation. So if you look at the last launch, it has done better than our expectations. We continue to see very strong growth there.

Speaker 2

Right Now the indication for the Vetscan images is in fecal and that's a large market. It's about $500,000,000 growing at 7% to 8%. So we see really strong growth there. I don't know what, Nick, or anything you'd add?

Speaker 3

No, you've covered it well.

Operator

And we will take our next question from David Westenberg with Guggenheim Securities.

Speaker 9

Hi. Thank you for taking the question. I'm going to actually continue on Concept. And can you that was just asked with Katie. Can you help us conceptualize the size of the non therapeutic Revenue for Zoetis on a go forward basis and whether or not we should see it as a revenue contributor or as maybe a means of driving therapeutic Revenue and I'm going across the categories with like diagnostics, insurance, Embryx, genomics, etcetera.

Speaker 9

And then just a quick Question to the answer to John Block's question on the doubling of the pay market. Was that just in dogs and then Plus beyond that or was that $800,000,000 or the doubling of the $400,000,000 just dog and cat? Thank you.

Speaker 3

I'll start and see if Kristen wants to add anything. In terms of non therapeutics, if you look at diagnostics, for example, where we saw 38% growth This quarter, so roughly $99,000,000 of revenue on the quarter on the base of what we reported for the year. So in relative terms, it's The largest proportion of our revenue streams, certainly, but we're very much excited about the potential for the future in a very fast growing market Diagnostics, which we expect to grow faster than the overall animal health space for us. And really one more point that I'll make is overall we expect diagnostics, as Kristin covered earlier, Because of the impact to continuum of care, we think overall in use of diagnostics as we look to medicalization rates Across the pets will have a positive effect on overall therapeutics in the long haul. We think that's also an exciting Opportunity for the long term.

Speaker 2

Sharon, I can take your second question with regards to the cat market. Yes, we think that would be incremental. It is a little hard to size The cat market today, there's really not much of an OA pain market in the U. S. There is some international products that are approved.

Speaker 2

But as we talked about Doubling the dogs from $400,000,000 to $800,000,000 Again, it's a little hard to size the cat market. Maybe it's $100,000,000 We think you can double that as well. So I think that could be a 2 100 $1,000,000 market, which would make the OA category for us across dogs and cats potentially a $1,000,000,000 market that we can play in. So we think this is a very

Operator

And we will take our next question from Balaji Prashad with Barclays. Your line is now open.

Speaker 7

Good morning. Thanks for the questions. Just a couple for me. Firstly, on the parasiticide market, do you have a sense of relative size of where NexGarden, Bright October in the quarter. And if Trio growth came in as a cost of competitors or some market expansion, On the same point, you recently got a label expansion for Simparica.

Speaker 7

Could you also just describe take us through the implications for it commercially? On the guidance side, could you also just take us through what led to a 1% revenue guide change and a 2% increase in SG and A and where those Increased expenditures are being used. Thanks.

Speaker 2

Sure. Thanks, Prashant. I'll take the first question and I will let Whitney take the second one. As we look I don't I can't get into what our competitors' product sales are. We remain quite excited for what Simparica is doing.

Speaker 2

We did get the additional label claim. That was expected. That was included in the guidance that we had. In the sense of where are we getting some of those sales from, it is an and. So We are both growing the market.

Speaker 2

I think more people are moving back into prescribed products versus some of the over the counter, But we're also seeing that we are taking share from many of our competitors as well. So, it's an exciting opportunity across both dimensions. Do you want to take his other question?

Speaker 3

Yes. Look, one thing I would add in terms of ferriciticide, it's a $5,000,000,000 market that's growing around 5 And we're gaining share in this marketplace. We do think that with the triple combo, it's improving compliance with respect to heartworm, Etcetera. And so that will have the opportunity to continue to expand the market as well. So we're very pleased with the performance across our franchise portfolio And the share that we're gaining, we'll continue to invest behind

Speaker 4

this product and this portfolio as well.

Speaker 2

Did you want to take the increasing guidance

Speaker 3

Yes. Look, certainly, and when you look at our guidance, compared to where we started in the year and given the overall market positive market dynamics that we see, Our portfolio is performing very well. Kristen covered some of the trends around vet visits and so on. All those are contributing towards Optimism, you've seen the year to date performance that we've delivered. And in fact, we've taken our guidance in terms of top line operational growth From where we started in the year at 9% to 11%, now at 12.5% to 13.5%, so full three points above where we started the year.

Speaker 3

So we're very pleased with how we started the year. I think if you look at from an overall perspective, certainly the first half and the second half of the year, if you look at purely top line, it's really roughly in line, Pretty consistent sort of phasing across the year. The growth rates will moderate based on last year, largely not really a Matter of how this year is executing for us, we're in a very positive market dynamic with very strong performance across our portfolio. Last year, given the pandemic, there's a bit of variability across the year. There was disruption in the first half of the year, given COVID-nineteen, which created more demand That got pent up and caught up in the back half of the year.

Speaker 3

So that's going to create a dynamic in terms of what the Versus look like in terms of growth rates for SaaS for the second half. We're very pleased with where we are and we are going to continue to invest behind our key portfolios and brands.

Operator

And we will take our next question from Chris Schott with JPMorgan.

Speaker 10

Great. Thanks so much for the questions. I just want to focus a little bit On U. S. Livestock, can you just talk a little bit again about the 2Q dynamics?

Speaker 10

Because it seems like you were going up against a fairly easy comp. The business is still down about 8 percent. So I was trying to get a sense of like as we think about the rates of decline you're expecting in the business in the second half of the year, just help us conceptualize what type of erosion you're Thinking about as we go up against what seems like some tougher comps for those quarters. And then maybe from a longer term perspective, can you just walk a little bit through about How you're thinking about recovery for U. S.

Speaker 10

Livestock as we think about both poultry and cattle as we get past some of these kind of more challenging near term dynamics and just think about the longer term business? Thanks so

Speaker 2

much. Thanks, Chris. I'll start on some more strategic drivers and I'll let Whitney get into some of the specifics here. Last Ag really has performed as we expected. As we talked about going into the year with the LOE of Draxin, we did expect a decline in general as we talked about for the last few years.

Speaker 2

That's Generally 20% to 40% over 2 to 3 years. And as we said, we thought that would be faster. As you look at the quarter, we did see a 19% decline Overall in Draxin specifically, and I think that is one of the key factors in the U. S. And as Wendy mentioned earlier, I think Continue.

Speaker 2

But if you look at broader livestock, historically, it's a low to mid single digit grower. Certainly, as you saw in 2019 with ASF in China and 2020 with COVID, it's been lower than what you've historically seen. We do believe, as we said, that overall this will trend back to a market growth in the mid single digit, call it, around the 4% range, maybe 3% to 5%. And then we think the widest will be in line with that. It could be slightly lower over the next few years as you see this year.

Speaker 2

And really the strategic driver of that is that we have a number, we have The largest number of products hitting lots of exclusivity. If you look at our guidance, that's why it is baked in. So it wasn't just Draxin. We also and poultry, as you were just referencing, had Zolomix and NVMD as well. But again, we've got good growth in some of these other species as well.

Speaker 2

As you look at poultry, we're really excited Growth of vector vaccines, it's a $300,000,000 market growing 13%. We've already launched 2 of them, Newcastle and IBD, and that will be a growing portfolio for us. I'll let Whitney get into some of the more specific numbers. But I do think as you look at livestock just more strategically on a higher level, I It's going to be a little more crowded than companion animal, but we do think it goes back to historical levels. Whitney, if you want to build on that.

Speaker 3

Yes. Look, I mean, look, if you look at livestock Across the world with protein consumption, population growth, income levels rising, etcetera, we expect those to continue to drive growth in livestock For the long term, we delivered 3% on the year, as we said, it's as expected. And as was covered in the prior earnings call, we expected declines in the U. S, Given the generic entry for Juraxin. Now the Q1 did benefit a bit from 2 things.

Speaker 3

1, there was a A little bit of a delay in terms of the entry of generic for dragsin, but also we ran a promotion in the Q1 that accelerated some revenue into Q1, taking it out of Q2. So take those into consideration, which are exactly in line with our defense strategy, LifeSpark really is performing exactly as we expected. Given that the intensification of generic competition as we expected just began really into the late Q1 into the Q2, we expect those declines To continue, and again, they're right in line with our expectations here.

Operator

And we will take our next question from Steve Scala with Cowen.

Speaker 4

Thank you. A local paper in Nebraska Last week that Librella is being manufactured at the Lincoln plant. If that is correct, then is that product ultimately destined for the U. S? And as the U.

Speaker 4

S. Regulatory process evolves, can you confirm that it is still the case that no new clinical data is required? Thank you.

Speaker 2

Sure. We want to I think I mentioned earlier, we do believe we will see approval in the U. S. For both Librella and Silencia, in 2022 with Librella most likely in the second half. We have long term These are from obviously multiple sites.

Speaker 2

I don't think the U. S. Will be manufactured out of Libriella at launch. We certainly are looking at potentially Adding sites, just given the strength, as I mentioned earlier, of that product. So we have been having ongoing good conversations with regulatory authorities and we remain on track for the guidance we previously provided, which is approval for both those products with selenzia likely earlier in the year and But you should not probably expect that we'll be producing out of Lincoln, Nebraska at launch for Lavela.

Speaker 2

Look, given our global footprint And, and

Speaker 3

presence, you should not beat anything into the location of manufacturing, in terms of where products are destined to. In particular, we'll continue to leverage both our own footprint as well as 3rd parties in our manufacturing. And so I wouldn't draw any conclusion from that.

Operator

And we will take our next question from Elliot Wilbur with Raymond James.

Speaker 11

Hi, guys. This is actually Michael Paralari filling in for Elliot. Thanks for taking my question. So I believe you said in Ask that Trio has had, about a 90% uptake on top corporate accounts. Just wondering if you could provide an date though on penetration across all targeted accounts.

Speaker 11

And then in relation to the DTC campaign, No, you said in your prepared remarks that it remains beneficial. But just wondering if you could give a updated timeline on how long you could see it continuing? And then also how you see incremental spend really driving ROI here? Thank you.

Speaker 2

Sure. Thanks, Michael. We continue to be very we are at or surpassed all the clinic penetration that we Expected for Trio. So we're quite pleased with that. And right now, we're a little more focused on reorder rates, as I mentioned.

Speaker 2

We think the important trend for us now is I think our penetration is where we would And it's very broad across the U. S. For Trio and we're really focused on those reorders which we now have at 80% and Continuing to grow those overall reorder rates. Direct to consumer advertising is critical in this category. It is $5,000,000,000 It is a category that Consumers really do go in and ask for brands.

Speaker 2

We do obviously track our ROI on this. And as you've seen and as Weny mentioned earlier, we will continue to invest We have seen incredibly strong ROI in doing so, and that is why you're seeing us step up that. As we talked about earlier, it has Outpaced our expectations. I think that has everything to do with the innovative nature of this product, but it also has to do with the Investment we put behind that in direct to consumer advertising and investing with our field force, and we will continue to do that. You should expect This year and next year, certainly, we have a window of opportunity with no competition in the U.

Speaker 2

S, and we will leverage that opportunity. We still don't know exactly when we'll see competition. At this point, we don't expect any till the second half of twenty twenty two at the earliest, as we mentioned. But as long as we do not have We will invest aggressively behind this brand. And even when we do, we will do it as well because we've seen very strong ROI in doing that.

Operator

And we will take our next question from Naveen Thai with Citi. Hi, good morning. Could you comment on capital allocation? Shall we expect a continuity of financial policy going forward? And also following Jurong's, shall we expect further geographic expansion via bolt on acquisition in addition to internal investments?

Operator

Thank you.

Speaker 3

Yes, sure. So in terms of capital allocation, you should expect consistency in terms of how we Manage capital allocation with the focus 1st and foremost on internal investments. We have opportunities in terms of R and D, investing behind our brands on advertising promotion perspective, CapEx to support our growing pipeline, including monoclonal antibodies, etcetera. That's really our first priority. Of course, we'll take advantage of Any opportunities from a business development perspective for M and A that helps to accelerate our growth in various markets and areas as well.

Speaker 3

So that really follows in terms of investments. And then as we have free cash flow generation, very strong free cash flow generation, we'll look to return Cash to our shareholders, we've increased our dividends, as you've seen, typically faster than our revenue. And we initiated our share buyback, That remains consistent, I would say, with the past.

Speaker 2

And then on Gerax, do you want to just comment on the BD geographic Yes.

Speaker 3

So look, certainly, Xerox is we're excited to be bringing them once we get through the process Over the next 6 months and close the transaction, we're excited to bring Xerox into the Zoetis family. Australia is our 5th largest market globally. And this is really at our core. It does increase our presence in the therapeutic area Products as well. So we're very excited about that opportunity and what it does for us.

Speaker 3

And we'll continue to look for bolt on opportunities to bring on both the core as well as other areas of the business, whether it's diagnostics or what have you as well.

Operator

And this does conclude today's question and answer session. I will now turn the program back over to Kristin Peck for any additional or closing remarks.

Speaker 2

Great. Thank you everybody for your questions today and for your continued interest in Zoetis. We look forward to keeping you updated on our business The remainder of the year and continuing to deliver on our results and innovations that you and our customers expect. So thanks so much for joining us today. Stay safe.

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Earnings Conference Call
Arko Q2 2021
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