Zoetis Inc. (NYSE:ZTS) Q1 2024 Earnings Call Transcript

Zoetis Inc. (NYSE:ZTS) Q1 2024 Earnings Call Transcript May 2, 2024

Zoetis Inc. beats earnings expectations. Reported EPS is $1.38, expectations were $1.35. Zoetis Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the First Quarter 2024 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of the call via dial-in or on our Investor Relations section of zoetis.com. [Operator Instructions]. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Steve Frank: Thank you, operator. Good morning, everyone, and welcome to the Zoetis first quarter 2024 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I’ll remind you that the slides presented on this call are available on the Investor Relations section of our website, and that our remarks today will include forward-looking statements, and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today’s press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q.

Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company’s 8-K filing dated today, Thursday, May 2, 2024. We also cite operational results, which exclude the impact of foreign exchange. And with that, I will turn the call over to Kristin.

Kristin Peck: Thank you, Steve, and good morning, everyone, and welcome to our first quarter earnings call for 2024. Today, we reported outstanding first quarter results underscored by steady demand for our products, a focused strategy and our purpose-driven colleagues. We delivered 12% operational revenue growth and grew adjusted net income 15% operationally in line with the tenets of our value proposition. Driven by the launch of our osteoarthritis pain franchise, the U.S. led the way with 16% growth and 8% operational growth internationally. More specifically, globally, Librela grew 189% operationally, including $40 million sales in the U.S., in line with our expectations. The powerful human animal bond fueled demand for our companion animal portfolio with 20% growth operationally, while livestock declined 1% operationally.

This quarter’s results even amidst global uncertainty are a testament once again to the power of our diverse and durable portfolio across markets, species and therapeutic areas. It also highlights the continued rise and resilience of the animal health industry. Our purpose and performance are rooted in science, which has always been the great disruptor. And as animal health is increasingly essential for nutrition and companionship, caregivers demand even more high quality innovation. That means we identified the most prevalent areas of unmet veterinary need and invest in, develop, manufacture and deliver life-changing products that customers have been waiting for. Take for example, Librela and Solensia, our injectable monoclonal antibodies to treat OA pain in dogs and cats, which are helping millions of pets return to play.

With more than 18 million doses distributed worldwide, we are providing long lasting relief to animals, many of whom were previously undiagnosed or untreated due to limitations of NSAIDs. With nearly 40% of all dogs suffering from OA pain globally, we believe just one-third of those are being treated. So we’re just scratching the surface of care. And cats are visiting the clinic more often. In fact, we’re helping curve clinic fears with Bonqat, the first FDA approved product to alleviate anxiety in cats, which means we’re expanding care in a historically under-medicalized area of the market. We understand that social media is a form for convening, a place for pet owners to connect and to share. But we also have a responsibility to empower our customers to make informed decisions grounded in science and data.

We are unwavering in our commitment to rigorous safety and quality standards, which has earned us the trust and confidence of veterinarians worldwide. Backed by that commitment, Librela and Solensia are safe and effective. They are anchored in 10 years of science and have been used in Europe for more than three years. In the U.S., 78% of veterinarians who are at the center of care are very satisfied with Librela. This is driven by real world experience and consistent with the feedback we hear in other markets. And our research indicates that 46% of vets globally will treat OA earlier and 65% will treat more dogs now that Librela is available. To accurately reaffirm the safety and efficacy of these therapies, we are doubling down, working directly with veterinarians who need these products, hosting live sessions with our Chief Medical Officer and expanding online education and training while deploying capital to expand our DTC strategy.

And veterinarians continue to be confident in Librela as evidenced by a recent blind survey of U.S. vets confirming that perception and intent to prescribe remain unchanged. We remain confident that OA pain could be our next $1 billion franchise, because we are meeting the needs of an underserved market. We are growing by nearly every metric, including adoption, penetration, reorder rates, patient share and expanded utilization. And looking at our 4-week rolling average in the U.S., we’re excited to report that sales steadily increased through April. Our performance speaks to the power of the human animal bond, discerning pet owners want option and they will work with our vets to find relief for their best friend. Beyond OA pain, Zoetis has been able to lead the market in other key categories because we deeply understand our customers’ needs.

This allows us to not only compete in existing markets, but again to create entirely new ones. And Science has created something completely unique to our industry, $2 billion franchises. Our parasiticides portfolio expanded the total market based on deep customer insights. Before Simparica and Simparica Trio, we were number 5 in this category. These innovations changed how we compete. Today, we are number 2 and continue gaining share and growing the market even in the face of competition. Similarly, we were first to recognize the new therapies where needed to treat canine ish safely and effectively. That market foresight changed the treatment paradigm and revolutionized pet care. A decade of dermatology has led to three products, 20 major lifecycle enhancements including Cytopoint, the first ever animal health monoclonal antibody and the first chewable with Apoquel chew.

From what was once believed to be just $100 million market has grown to $1.4 billion, because we know what our customers need. Today, more than 18 million dogs are treated for allergic ish and atopic dermatitis and another 13 million remain untreated globally. We built $1 billion franchise and demonstrated the durability of our portfolio and we will continue growing this franchise underpinned by strong brand equity, first mover advantage, lifecycle innovation and strong customer relationships. We’ve led in parasiticides, dermatology and now OA pain. And each time our innovations have created new categories in animal health, you’ve seen the total industry opportunity expand. Now moving to livestock. I’m sure you all saw the news this week on the announcement of our agreement with Phibro Animal Health to sell our global medicated feed additives and certain water soluble product portfolios and related assets for $350 million.

This deal is another great example of Zoetis’ disciplined capital allocation strategy to focus investments in areas with the greatest growth potential and innovation that are aligned with our key capabilities. I’m confident that under Phibro’s management, the global reach of these products will continue to expand to meet customer needs worldwide. We remain very committed to livestock and to sharpening our focus and our core innovative livestock growth areas including preventatives, antibiotic alternatives and genetics. In summary, for more than 70 years, Zoetis has been leading the industry with our commitment to innovation. We’ve invested over $5 billion in R&D since our IPO, which has brought more than 300 product lines to the market. Science is and always has been the great disruptor and at the core of our success in delivering the innovations that veterinarians, livestock producers and pet owners expect from us.

Our pursuit of science has led to breakthroughs in dermatology like Cytopoint and Apoquel chew, in parasiticides and Simparica Trio and now the latest in OA pain with the Librela and Solensia that are revolutionizing animal health. Blazing new trails isn’t easy. But time and again, our purpose driven colleagues have proven their ability to expand our industry leadership and forge entirely new markets. And we remain committed to delivering strong growth through our innovative franchises and diverse portfolio, while continuing to invest for the future. Looking ahead to the remainder of 2024, our increased operational guidance reflects the resilience of the animal health market and the execution of our strategic growth priorities. We will continue to be disciplined yet adaptable in our approach to the opportunities, potential challenges and economic shift that occurred throughout the year.

And with that, I will turn it over to Wetteny.

Wetteny Joseph: Thank you, and good morning, everyone. As Kristin mentioned, we had an outstanding start to the year, driven by the underlying strength of our companion animal portfolio, particularly our innovative products, as well as price growth across all species. In the first quarter, we generated revenue of $2.2 billion, growing 10% on a reported basis and 12% on an operational basis. Adjusted net income of $634 million grew 4% on a reported basis and 15% on an operational basis. Our 12% operational revenue growth was due to the underlying strength of our companion animal portfolio aided by the impact of a weak comparative quarter in our U.S. companion animal business. However, the majority of this visibility to growth was offset by headwinds related to economic conditions in China, the impact of a tough comparative quarter in livestock due to the timing of supply for certain products last year and inventory destocking related to our U.S. diagnostics sales model change.

Of the 12% operational revenue growth, 7% is from price with 5% growth in volume. While we saw price growth across our portfolio, price was favorably impacted by hyperinflationary markets, especially Argentina, which contributed 2% to our overall price growth. The volume growth was driven primarily by new products, including our monoclonal antibodies for OA pain, Librela and Solensia as well as our key dermatology products and Simparica Trio. On a segment basis, the U.S. posted $1.2 billion in revenue, growing 16% on the quarter, while our international segment reported revenue of $1 billion with operational growth of 8% on the quarter. Our companion animal portfolio was the main driver of revenue growth in Q1, growing 20% operationally. This growth was partially offset by livestock, which declined 1% on an operational basis.

We saw double-digit operational companion animal growth in both our U.S. and our international segments again this quarter, driven by the strong performance of our innovative products with contributions from both volume and price. Simparica Trio was the primary driver of growth in the quarter generating $243 million globally, representing operational growth of 61%. We saw strong demand for Trio as well as continued growth in patient share even with competition. Our OA pain mAbs were also a significant contributor to growth, posting $131 million in the quarter. Global growth came from the impact of new launch markets both in the U.S. and internationally. In our early launch EU markets, recent vet surveys showed an increase in muscle on therapy and expansion into more moderate OA cases.

Our key dermatology products grew 25% operationally in the quarter with $360 million in global revenue. Wealth within dermatology was driven primarily by our Apoquel franchise where we are seeing solid conversion to Apoquel chewable including a modest impact from the initial distributor stocking in the U.S. Cytopoint growth continues to be driven by vet and pet owner preference for injectable methods of treatment. Our global companion animal diagnostics portfolio declined 12% operationally with declines in the U.S. driven by a distribution model change. These declines were anticipated as our distribution partners sold off their remaining inventory due to our transition to a direct only model for our U.S. diagnostics portfolio. U.S. declines were partially offset by growth internationally.

Our livestock portfolio declined 1% operationally as expected, driven by a tough comparative quarter in the prior year, especially in the U.S. as well as impacts from the ongoing economic conditions in China. This decline was partially offset by price growth in our other international markets. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.2 billion in the quarter growing 16% with companion animal growth of 25% and livestock posting a 7% decline. The companion animal performance in the quarter was driven by Simparica Trio, our key dermatology portfolio and the impact of the launch of Librela in the U.S. as well as the impact of a weak comparative quarter. Our outstanding U.S. companion animal growth came in the quarter where we saw vet clinic visits decreased 1.5%.

We continue to see growth in the therapeutic visits, while wellness visits drove the decline. Sales outgrowth in the retail and home delivery continued to uptake vet clinic fulfillment, which is based on growing pet owner preference for these alternative channels. This dynamic is expected to put continued pressure on total vet clinic visits without impacting our expectations for revenue. Despite the visit decline, revenue and spend per visit in the clinic grew 4.5% and 6%, respectively, which reflects continued pet owner willingness to pay. Turning to product performance, Simparica Trio posted sales of $205 million in the quarter growing 61%. We continue to be the market leader in the triple combination parasiticide space. Our leading footprint across channels has allowed us to continue to drive dosage growth through increased compliance even with declines in wellness visits at the clinic.

In addition to a weak comparable period in the prior year, we are seeing favorable price realization due to more targeted discount programs to vets as well as channel dynamics. Key dermatology product sales in the U.S. were $233 million for the quarter growing 27%. We saw growth in both price and volume and across both Apoquel and Cytopoint. Growth also benefited from a weak comparable period in the prior year. Market demand for our dermatology products remains high. In the quarter, we saw growth in both our patient share as well as higher periodic visits in the clinic. Additionally, growth of retail auto-ship programs continue to bolster compliance. At the beginning of April, we made Apoquel chewable available through our distribution partners.

Our pay mAbs, Librela and Solensia posted a combined $57 million in U.S. sales in Q1. Librela generated $40 million in the quarter with underlying vet demand continuing to build on the momentum from our full launch in Q4 of last year. Excluding the impact of the initial clinic stocking, which we were provided last quarter, we are seeing robust sequential quarter growth in Librela in line with expectations. We continue to see good growth in penetration as well as strong reorder rates, which are approaching 80%, all of which points to positive real world satisfaction in the clinic and among pet owners. We remain confident not just in the safety and efficacy of Librela, but also in our expected performance. As Kristin alluded to, we have seen steady increasing trends in our trailing 4-week sales average in the U.S. even into April after the increased media attention.

We continue to see steady progress in Solensia, which had U.S. sales of $17 million in the quarter, more than doubling our prior year Q1 sales. We have indicated the feline market needs significant development, but we are pleased with our progress thus far. Solensia is now the market-leading product for feline OA pain in the U.S. and we have seen a significant increase in the medicalized patient pool since launch. Our U.S. companion animal diagnostics portfolio declined 21% in the quarter, driven primarily by distributor inventory work downs following our channel strategy change. This destocking is in line with our expectations and has negligible impact on our underlying clinic demand. U.S. livestock declined 7% in the quarter, while our underlying business performance in the quarter was as expected.

Our results are reflective of a strong comparative period in Q1 of 2023 in which we grew 15% due to the return of supply on several products, primarily in cattle. Sales of swine products declined due to decreased sales of vaccines as well as JAKs. In poultry, we saw declines as a result of increased generic competition in our medicated feed additive products. Moving on to our International segment, where revenue grew 3% on a reported basis and 8% excluding the impact of foreign exchange. Companion animal grew 14% operationally and livestock grew 2% operationally. Increased sales of our international companion animal products were driven by OA pain mAbs, key dermatology products, vaccines and small animal parasiticides. This growth was partially offset by impacts in China.

Our international OA pain mAbs grew 67% operationally to $74 million in combined revenue in the quarter. International Librela sales were $59 million, growing 71% operationally. Growth is balanced across new launch markets and our first wave EU markets. We continue to see evolution in the European markets where we have seen expansion in Librela’s use in moderate OA cases, which according to the latest vet surveys now represents the majority of Librela patients in Europe. We remain pleased with the success of our DTC advertising campaigns in increasing pet owner awareness of OA. Solensia sales were $15 million internationally in the quarter, growing 54% on an operational basis. Our international key dermatology portfolio grew 23% operationally in the quarter, posting $127 million in sales.

We saw double-digit operational growth across most of our major markets driven by higher compliance and new patients. Wealth was also favorably impacted by pre price increased buy-ups in Japan and certain European markets. Our international small animal parasiticide portfolio grew 6% operationally, driven by our Solensia franchise with Simparica Trio growing 58% operationally to $38 million in sales. Trio growth benefited from continued uptake in Europe, driven by key account penetration and field force effectiveness as well as contributions from Trio’s launch in China. Simparica posted $56 million in revenue, growing 22% on an operational basis in the quarter. This growth was partially offset by 29% operational decline in our Revolution franchise, which generates a high proportion of sales in China.

International livestock grew 2% operationally in the quarter, driven by price increases especially in high inflationary markets. Price growth was partially offset by volume declines across all of our species, partially driven by a tough comparative period in the prior year due to the return of supply of certain livestock products. The volume declines in livestock were driven by cattle due to a tough comparable period related to supply and worsening market conditions in Australia. Our international swine portfolio saw volume declines driven by China, where we saw lower hog prices as well as a reduction in herd sizes. In sheep, we saw declines from herd reductions due to expected weather conditions in Australia and New Zealand as well as supply constraints on eight key products.

As we mentioned last quarter, we continue to see economic challenges in China, where low consumer spending and high urban unemployment have reduced spending. We are also seeing a slowdown in livestock with lower pork prices and smaller herd sizes. The impact on our growth is expected to moderate late in the year, but we expect to continue to see headwinds throughout the year across both companion animal and livestock. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 70.7% declined 10 basis points on a reported basis compared to the prior year. Foreign exchange had an unfavorable impact of 180 basis points on our reported adjusted gross margins. Excluding FX, we saw higher margins due to price increases, favorable mix and lower freight costs, partially offset by higher manufacturing costs, especially in hyperinflationary markets.

Adjusted operating expenses increased 11% operationally, driven primarily by SG&A growth of 10% operationally, mainly due to higher compensation related expenses as well as increased advertising and promotion spend on our OA pain mAbs. R&D grew 13% on an operational basis, driven by higher project spend related to both recent acquisitions as well as advancements of our pipeline candidates. The adjusted effective tax rate for the quarter was 19.7%, a decrease of 80 basis points, primarily due to a higher benefit in the U.S. related to foreign derived intangible income and a more favorable jurisdictional mix of earnings. And finally, adjusted net income grew 15% operationally despite a $31 million headwind to growth from the non-recurring benefit of our prior year royalty settlement.

Adjusted diluted EPS grew 17% operationally for the quarter. Capital expenditures in the first quarter were $140 million. In the quarter, we repurchased $339 million of Zoetis shares. Before moving to guidance, I wanted to comment on our recent announcement to divest our medicated feed additive portfolio and certain water soluble products to Phibro Animal Health. This is a transaction that demonstrates Zoetis’ disciplined capital allocation strategy to focus our investments on innovative solutions that advance animal health, productivity and sustainability. This divestiture will allow us to remain focused on other livestock solutions, including vaccine, biologic and genetic programs that are more aligned with our strategic priorities. Now moving on to guidance for full-year 2024.

As we have mentioned, we had an outstanding first quarter that highlighted our ability to deliver through multiple sources of growth. Our performance in companion animal, especially in parasiticides and our key dermatology franchises exceeded our expectations. Additionally, we continue to be pleased with the progress of the U.S. launch of Librela and are confident in our ability to meet expectations. We are therefore raising our 2024 operational guidance provided during February’s earnings call. Note that guidance reflects foreign exchange rates as of late April. The updated foreign exchange rates negatively impacted our reported revenue guidance by approximately 2% and our reported adjusted net income guidance by approximately 4% when compared to our initial guidance issued in February.

For the year, we expect revenue between $9.05 billion and $9.20 billion, representing a range of 8.5 to 10.5 operational growth. Our increase in operational growth is reflective of Argentina’s pricing impact as well as due to performance in our companion animal parasiticides and key dermatology products. We now expect our full year operational growth for Simparica Trio to be double-digits, while we expect growth in our key dermatology products to be in the high single-digit range. As we stated earlier, we remain pleased with our U.S. launch of Librela. Our expectations for Librela for the year remain unchanged. Moving down the P&L, we now expect adjusted net income to be in the range of $2.62 billion to $2.67 billion, representing operational growth of 13% to 15%.

And finally, we expect adjusted diluted EPS to be in the range of $5.71 to $5.81 and reported diluted EPS to be in the range of $5.34 to $5.44. Just to summarize before we go to Q&A, we are very pleased with our start to the year. While our reported results are reflective of various foreign exchange related headwinds, operationally, we continue to deliver growth across our key therapeutic areas and across most of our major markets. This growth highlights the diversity and dependability that allows us to continually outpace the animal health market. Additionally, we continue to lead the way creating new markets and launching new innovation that increases the standard of medical care for animals. Now, I’ll hand things over to the operator to open the line for your questions.

Operator?

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Q&A Session

Operator: [Operator Instructions] With that, we will take our first question is coming from Michael Ryskin with Bank of America.

Michael Ryskin: First, I want to ask just about the guide change. It seems like there’s just so many moving pieces right now, the FX moves, you’ve got all the price you’re taking in Argentina, some of the stocking comments for Apoquel chewable and obviously Librela. So just this early in the year to decide to raise the guide, just sort of like what went into that and what do you see as the upside risk or downside risk to that as you go through the year? And then just quick follow-up question, I’ll squeeze both in. My question is on margin. With all the price, with all the strength in companion, gross margin was still a little bit weaker in the quarter, and you’re not raising EPS operationally for the year. So just what’s going on with the gross margin and why isn’t the flowthrough to the companion animal portfolio better?

Wetteny Joseph: I’ll be happy to take this, Mike. Look, we’re very pleased with an outstanding quarter to start the year, clearly delivering 12% operational growth at revenue, 15% at adjusted net income from an operational perspective. Could be more pleased with this. In terms of the guidance, of course, there are puts and takes as you laid out. The performance in the quarter, when we think about the prior year comps, we think these are largely offsetting puts and takes that go into the performance. And I think that feeds into the later part of your question, which is how do we decide to go into increasing our guidance from an operational perspective. But when we look at the puts and takes, clearly, the performance from our Trio and key derm continued growth as we continue to ramp the launch of Librela, not only in the U.S., but across international markets, give us a lot of confidence in terms of underpinning the growth that you saw in the quarter from an operational perspective.

Yes, there are some easier comps when you look at the companion animal business, particularly in the U.S. We talked about those at length last year with the destocking and the price and the timing of promotion activity, etc. But we also had some headwinds where we had strong comps across livestock in particular because of the timing of supply last year, as well as the China market that we’ve been talking about as we expected, as well in Argentina, given the pricing impact issue and in Australia and New Zealand. So when we take a look at those, we think there’s probably 1 to 2 points of tailwind on a net basis is what we would estimate coming into the quarter. But then when you look at the bottom-line, 15% operational growth in adjusted net income despite the royalty settlement that we had last year, again, is an offsetting element.

So we still end up with a sort of an operational growth that’s in the same range that we’ve delivered. And so, though it’s still early in the year, we have confidence in the underlying market and demand that we see across our products. We’re seeing increased periodic visits into the clinic for dermatology. Trio, despite head-to-head competition, had a phenomenal quarter of 61%, with $243 million of revenue, with the U.S. leading that at 61% as well. So when we take all those into consideration and we’re seeing price realization across the globe, including increased price from hyperinflationary market like Argentina. So that gives us enough confidence to be able to raise the guidance and still be very confident in delivering the revised guidance that we did today.

Now in terms of margins, let me just make sure I give you — cover that. If you look at the headline, right, the gross margins were down about 10 basis points. FX had about nearly 200 basis points headwind in this. I think it’s important to remind everyone, there’s a significant devaluation in Argentina that occurred 2x last year, in December, as well as prior to that in August. The December devaluation is actually in our first quarter. Keep in mind, our international operations closed their books a month earlier. So December is actually Q1, so you’re seeing the impact of that Argentina devaluation play out, particularly as you look at inventories and the impacts on COGS, cost of goods sold, as well as lower in the P&L. And so when you factor those out, we actually had about a 200 basis points expansion operationally in our gross margins, which again aided our way into the expansion of adjusted net income and growing that at 15%.

Operator: Our next question comes from Jon Block with Stifel.

Jon Block: I guess I’ll ask both upfront as well. Wetteny, I’m getting a lot of questions on Argentina, so hope this is clear. The strength of the top line was big. You raised the guide revenue by 150 bps for the year. You mentioned 200 bps of year-over-year growth in the quarter from Argentina, if I have that right. But what is the incremental growth contribution from Argentina for the year? I just think everyone’s like trying to figure out what the raise is, call it, like ex Argentina due to that market’s hyperinflationary environment. Hope that’s clear, let me know if it’s not. And then maybe just to shift gears, Kristin on Librel, very helpful comments on the April run rate. In over checks, we hear about a safe drug that might have some issues in dogs with neurological issues. And so just would love your thoughts on that. And does the company plan to do any, call it, follow-up studies maybe addressing select AEs, that would be great?

Wetteny Joseph: I’ll take the Argentina question first and then Kristin will cover Librela. Look, the way I look at it, as we said in the prepared commentary and you quoted here, there’s a 200 basis points contribution to the top-line from Argentina in the quarter. And so, if I were to say, look, we’re still early in the year and we’ll continue to look to take price in that market and we’ll have to watch how that plays out between price and volume as we go. It’s a hyperinflationary market. We’re pegging what we’re looking at based on the actuals and what we anticipate. But again, it’s still early in the year. So if you were to take this 200 basis points and you spread them for the year, in effect, you could say that’s 50 basis points contribution to the year, if I don’t account for any more price from here on, right?

And so that’s kind of how you’d look at it and you said, well, the other 100 basis points in the raise is from the rest of the underlying business. The answer is somewhere between there, right? But certainly, there’s contribution from the growth we’re seeing, which we said is above our expectations for our derm franchise, delivering $360 million, growing 25% on the quarter, as well as Trio, which continues to perform really well for us. And so those, I would say, are significant contributors to the top-line guide that we gave. So we’re increasing the top-line by 150 basis points in terms of the range of operational growth and Argentina is a piece of that, but I would say there is significant contribution from the underlying business as well.

Kristin Peck: Sure, Jon. And I’ll take the second part of your question on Librela. I mean, first, I really want to underscore that we have the utmost confidence in the safety and efficacy of Librela. It has been used for over three years across the globe and over 14 million dogs and it’s approved in over 50 countries. And if you overall look at the rate of reported adverse events, it’s about 18% per 10,000 or 0.18% globally. And I think it’s important to keep in mind that no single adverse event is classified under the EMEA guidelines as more than rare, which is more than 1 to 10 out of 10,000. So we remain very confident in the safety and efficacy of this product. We watch these reported adverse events very carefully. It’s an important part of what every pharmaceutical company does to make sure that we understand any trends that we’re seeing.

We’ve remained very confident in the data. I really want to underscore, they’ve been on the market for three years. So we continue to watch the AEs that are coming in. And to be clear, the top adverse events today are number one, lack of efficacy, so it’s not working maybe as well as they wanted. Polydipsia, which is frequent drinking. And the third being polyuria, which is frequent urination. So the other ones you’re talking about remain a rare side effect. In other words, not more than 1 in 10,000. So hopefully that answers your question.

Operator: Our next question will come from Erin Wright with Morgan Stanley.

Erin Wright: Just another one on Librela. Just given the seller trends that you were mentioning, how do we think about the quarterly progression from here in the second quarter? And then also just like new patient starts, like how has that looked since kind of the media attention? And then on livestock and just a broader rationalization kind of the business with the selling of the feed additives business, which made sense. And do you see other opportunities to further prune the portfolio and presumably this lifts your long-term top-line growth targets and margin profile and just on the improved mix alone and the focus you can have on these higher growth, higher margin businesses. What does Zoetis look like in three to five years down the road? Because it could be potentially more skewed to that and how do you think about that?

Kristin Peck: Sure. I’ll let, Wetteny, why don’t you start with the Librela performance and the questions you got there and then I can take the livestock question after that, Wetteny?

Wetteny Joseph: Yes, I’d be happy to. Look, we delivered $100 million of revenue in Q1 on the Librela. That’s 189% growth over the prior year. Clearly, the U.S. contributing $40 million is a big part of that, but we are very pleased with the performance across our international markets, as well for Librela, and we saw a really strong sequential quarter growth across our international markets and we continue to see the uptake. We’re very pleased as well when surveyed European vet clinics actually are indicating that now they’re seeing more than 50% of the cases being moderate cases, which is very encouraging as we continue to progress the product having been out there for three years. In terms of the progression for the year, clearly, we continue to ramp in the U.S. and as Kristin said and we said in the prepared commentary, as we look at on a rolling four week basis, through the quarter and beyond the quarter into April, we continue to see steadily increasing orders of Librela as well, which again, caused us to be able to be confident in our expectations for Librela, as you look at the guidance that we gave as well.

We’re not going to get into very specific quarter by quarter, but I would say, if you look at the $40 million in Q1, there’s very little to no stocking in that number. Now we did speak at length in February about the stocking in the initial launch in the fourth quarter. We had about 2.5 months at the end of the year for the product launch and you have to factor holidays as well into that and we saw a very fast penetration into 60% plus in clinics very quickly, which means that there’s a lot more stocking in there. Now we gave you a range of somewhere between a quarter and a third of that being stocking. I would say it’s likely in the high end of that range. So when you factor that into the $40 million this year, this is really substantial sequential growth in Librela.

And as we said, we continue to see momentum in the product. The one thing I would remind everyone is, in international, we did have a number of markets that we launched in the second quarter last year. So we’ll be lapping those across the international markets. Those include Canada, Brazil, Australia, Japan, and so we will be lapping those, but we still continue to expect to see strong meaningful growth in the product, as well as sequential growth as we go through the rest of the year is what I would remind you in terms of how we expect progression for Librela.

Kristin Peck: Sure. And Erin, I’ll take your second question on livestock. As you and I have talked about many times, livestock generally historically in our industry has grown at around 2% to 4%. I know we grew less for a period of time when we were facing the LOE on DRAXXIN and with some large disease outbreak across the globe. But I think what you’re seeing is the wettest over the last year and going into this year, is returning more to those historic levels. I think if you look at this year, we expect to be above that level. Again, as Wetteny mentioned, Q1 is not a good indication. If you look at sort of the comparable that we had there. So we remain very confident again in livestock. We believe we’ll end at the higher end of that range.

As you look at the divestiture of our medicated feed additive and water soluble portfolio and assets, we continue to be disciplined around our capital allocation. We divested our Pumpkin Pet Care last year. This is something that as a leadership team we continue to do. We look at every asset we have and we want to make sure that we’re investing in highest areas of growth. So I think that’s something that’s just a rigorous part of how we manage the company. And as I think as you look at livestock, obviously, the divestiture of the medicated feed additives portfolio will increase the overall growth of the company and the overall growth of livestock and also help overall on margins. But our real focus of the divestiture really had to do with doubling down and investing in what we see our great potential in the livestock industry, and really playing to what are our core strengths in preventatives, into antibiotic alternatives, into genetics, as we think about vaccines, biologics and new genetic solutions.

So, again, we’ll continue to look at our portfolio as we always have and as we’ve done every year, but remain confident in livestock and especially this year in our ability to grow faster than the market.

Operator: Our next question is coming from David Westenberg with Piper Sandler.

David Westenberg: So you gave a lot of commentary on April and Librela sales, and it sounds like there’s week-on-week build. Just to confirm that is in fact clinic administration or end market that you’re looking at versus like stocking or sales out from you. Veterinarians are really behind the product. It seems like there is some consumer social media kind of stuff. I just want to confirm that the DT sales advertising is on track or if there’s any kind of changes there? And then just finally, if I could squeeze in just one more. In terms of your assumptions on that high single-digit in derm, what is the assumption in terms of competitive launch there?

Wetteny Joseph: Yes, David. Look, I’ll take a stab at this and then Kristin may add some. First of all, when you look at Librela sales in the U.S., keep in mind, Librela is sold direct to clinics and the turnaround is very fast. And so there’s no sort of channel dynamics to play out in terms of what we’re seeing. What we’re seeing from week to week is actually coming directly from what the clinics are ordering. And then look, DTC continues to be on track. As we said in our prepared commentary, part of the increase you see in our SG&A spend is really advertising and promotion behind our pain franchise, and clearly, Librela in the U.S. is a big part of that. And then when you think about derm, of course, very pleased with our performance here, $360 million, up 25%.

Now there is some soft comp in that. But when we neutralize for that, we still see really, really strong underlying growth and strong demand. And we continue to be able to take price across derm. Now of course, it’s still early in the year. So as we look at, particularly in the back half, we are factoring different scenarios around what’s the timing of competition. And while we remain confident in our ability to continue to grow our franchises post competition, as we’re doing in Trio, this can be some near-term or short-term promotional activity that we are mindful, right? So we do factor those into our thinking in terms of how we land at the high single-digit range, which is up from what we said last time, which was mid- to high single digit.

So clearly, our confidence continues to increase there.

Operator: Our next question is coming from Balaji Prasad with Barclays. Okay. We will take our next question from Brandon Vazquez with William Blair.

Brandon Vazquez: First, on Librela, I’ll ask two upfront here. On Librela, can you guys talk about are you starting to see any pockets of that going from maybe the more severe OA dogs and being used in the moderate OA population? Anything you guys can do to kind of help push that market development because that seems to be the bigger opportunity as you — as this grows over the coming years. Follow-up, second question is you’re spending over $600 million in R&D now. I think we’re about a year out from the nice Investor Day you guys held for us last year. Any meaningful updates in the pipeline that you guys can share with us, either new products or lifecycle innovation, that might be coming in the near to medium term?

Kristin Peck: Sure. Wetteny, do you want to take the first one on Librela and I can take the R&D question?

Wetteny Joseph: Yes. I’d be happy to. Look, we continue to be very pleased with the performance of Librela, as we said, both the U.S. and International. We did complete a recent survey of vet clinics across European markets. And after three years in the market, we are certainly seeing the transition to having a lot more moderate cases. In fact, vets, based on surveys, are saying more than 50% of the cases they’re seeing now are moderate and even some mild cases coming into the mix. So that’s very encouraging. And again, and that also contributed to an increase in months on therapy going somewhere between seven and eight months now is what we’re estimating based on those surveys with vets. So that progression is what we count on and anticipate, and we’re seeing that across international markets.

We’re still very early in the U.S. But that’s the sort of progression we would expect. And we’ll continue to educate vets on the product, as we’ve talked about, to continue to drive that as we move forward. Kristin?

Kristin Peck: Sure. And Brandon, to your second question on our R&D. Yes, you probably saw the strong growth in R&D in the quarter that is really because we remain very confident in our pipeline in many of the key areas that we mentioned at Investor Day, which was, I guess, a little less than a year ago, really investing behind some of the key therapeutic areas, both our long-lasting monoclonal antibodies, which will be some of the more near-term launches. We are not making any announcements on today’s call, obviously, with regards to that. But that’s going to be some of the more near-term launches. And then as we talked about, very excited as you look at renal, as you look at oncology and cardiovascular and diagnostics to continue to invest in those areas where we see huge potential.