Hi, good afternoon, everybody. My name is Erin Wright. I'm Lead Healthcare Services Analyst at Morgan Stanley. We're happy to have with us today, Zoetis, a leader in animal health. We have the CFO with us today, Wetteny Joseph. We also have IR in the audience as well, to help support, too. Just for quick disclosures, please see our Morgan Stanley Research website, morganstanley.com/researchdisclosures. If you have any questions, please reach out to your relevant sales representative at Morgan Stanley. And with that, I think we'll just kick it off and get right into Q&A, if that works. So I think I will start a little bit with kind of guidance, and what you gave in the most recent quarter, and thinking about it more from an operational perspective at first, and how you're thinking about the second half.
But the 6%-8%, how should we be thinking about the cadence from the third to the fourth quarter? There's a lot of moving pieces across both livestock and companion.
Yeah, look, we started the year with guidance of 6%-8% operational growth, and certainly the first quarter was impacted by some destocking, particularly in the U.S., from distributors. And we said we'd expect normalized growth for the rest of the year, keeping, keeping with that 6%-8%, which translates to somewhere around 8%, call it, operational growth. And you saw us put up 9% operational revenue growth in the second quarter, and we said, expect, you know, Q3 to be, you know, roughly somewhere in the mid to high end of our, of our, full year growth range, and for Q4 to be slightly below that, right? So I think, you know, sitting here, we're very confident in our ability to deliver, to what we expect, particularly from an operational perspective.
We expect a strong third quarter, perhaps from an operational standpoint, and have actually closed out our international. As you know, they closed out a month earlier. But we do see headwinds with respect to FX as we look at the rest of the year, certainly based on where rates are right now. So compared to at the time when we gave guidance, and we did revise for FX, already we've seen the dollar strengthen almost across the board, from Euro to just about every other currency. And so that's driving incremental headwind from an FX perspective, but operationally, we're very confident in what we're seeing across the business.
So FX may be a caveat, but still in a sort of 7%-8% range for the third quarter from an operational growth perspective?
Yeah. Yeah, I would, I would expect us to, to have a very strong third quarter.
And then talking a little bit about, you had an Investor Day more recently, mid- to high single-digit growth is what was implied, which was kind of high-level guidance. Could you put some more numbers around that particularly? And I think you called out sort of being a 3% or three-point premium to what market growth is. And can you talk a little bit about, you know, companion animal—what assumptions that is in terms of companion animal versus livestock, in terms of that mid- to high single-digit growth?
Yeah. So look, we continue to see and expect to see companion animal grow faster than livestock, though livestock is having a very good year on a year-to-date basis. This year, livestock is up about 8%. We expect that to come down to land us somewhere in the low single digits for the year, which is closer to what the market growth rate has been for livestock, which is somewhere in the 4% range, call it. And so as we look at beyond this year, we continue to see companion animal outpacing the growth of livestock as we look at the sort of the medium- to long-term.
And we see innovation driving that w e see continued willingness to spend on pet health and prioritizing those across pet owners, not only in the U.S. and Western European markets, but even across emerging markets. Even in the face of uncertainty in the macro that we've come into for the second year in a row, we continue to see really strong growth across across. And the first quarter was a little bit of an anomaly, I would say, but you saw the second quarter, companion animal grew 11%, with livestock growing 4% on the quarter, which is more of a typical sort of band, if you will, across our business. And we expect that sort of differentiation to be what continues for us as we look beyond this year.
So yeah, as you look beyond into 2024 with the rollout of Librela, does that put you more with, the bigger innovation cycles? Does that put you more at the higher end of that range?
Look, we won't speak to 2024 yet. I see the smile, so you knew that was coming. We won't speak to 2024 yet, but certainly we're very excited about the Librela launch in the U.S. And we continue to see strong performance, too, for Librela outside the U.S. In the markets in Europe that we previously launched prior to the second quarter, those grew about 50% year-on-year in the second quarter. And though we have a slightly tougher comp in Q3 versus Q4, coming into the back half, we expect really continued strong growth across those markets, plus new markets outside the U.S. that we've launched as well.
We launched four other markets in the second quarter, and so really great contribution from those markets as well in Q2, and we'll continue to see that beyond. We said we'd start an early experience program in the U.S. in September with a launch around the November timeframe. So everything continues to execute as we expect, and lots of excitement around that for us as we go through. And certainly we'll see a contribution from Librela in 2024, but won't speak to the overall expectations in terms of guidance yet.
That's fair. More of a bigger picture question, and I think this goes back to kind of your long-term growth and the three-point premium you expect to have relative to market growth rate and perpetuity. It's not just about one product launch. It's not just about Librela. It's about the broader portfolio, the bundling capabilities, the ability to leverage that one call point that you're selling into, whether it be the veterinary clinic or the livestock producer. And you know, are you fully leveraging your size and scale and bundling capabilities at this point? Or do you think that gets that should improve with Librela and the innovation cycle that you have ahead of you? Do you think that Zoetis historically has really tapped into that broader portfolio?
We have, but I'm someone who always feel like there's always room to continue to drive that, right? So we're very excited on Investor Day to be able to share not only how we will leverage our existing broad portfolio and product lines and categories and the billion-dollar franchises we have around dermatology, parasiticides, and now pain, et cetera. But you know, a very broad and deep pipeline of products we continue to work on. If you look at, for example, mAb substrates as a you know, a area to go after a number of different therapeutic areas, we have 50+.
And so we've been working on those as a platform for some time, given the success that we've seen from Cytopoint, for example, that we launched, you know, seven years ago, and seeing the comfort level of general practitioners in terms of veterinary professionals being able to use and inject monoclonal antibody to go after certain disease states. So that really opened up a lot for us going back then, and has influenced where we've invested, and go after unmet needs using that as a platform. And we believe we have a lead over the industry in that regard. So you're right, it's more than just one product. It's a number of different franchises.
It's platform and mAbs, and it's a broad category and very diverse business that has helped us to outperform the market to the tune of about three percentage points over a decade. And we expect to be and are confident we're in position to continue to drive that as we look ahead.
Then also on your long-term goals, you called out for just margin improvement, I think is what you said at Investor Day. So what does that mean? What does that mean in terms of margin improvement longer term as well as into 2024? What are those key drivers or, tailwinds and headwinds as we head into next year?
So look, I think if you look at the business and where we expect growth, and as we talked a little bit ago, we expect companion animals to continue to outpace livestock, and that has a higher margin profile. So that will continue to drive a mix up on all of our margin performance for the company. But we're not afraid to make investments where we see it, and we've been making investments if you look at the last few years. And despite that, if you take out FX and the effect it had, for example, in 2022, we still saw a margin accretion across the business, and we're expecting to be able to continue to drive those as we look ahead.
As we launch products like Librela, for example, that's a product that is both on a contribution margin and our gross margin, accretive to the company, particularly at scale. It might be slightly dilutive to companion animal initially, and so we'll see that effect as we go out of the gates in the first year. But beyond that, it'll be accretive across growth and certainly contribution margin perspective. So those will continue to help drive our margins for the business. But we are also, as I said, we're making investments in our R&D. We've made investments in our field force, et cetera, to drive and help capitalize on what you said, which is: How do we leverage our broad portfolio?
When we bring out innovation like Librela to the U.S., how does that help the entire portfolio of products and services we have for our customers? So we'll, we'll tap into those with the investments we've been making.
Okay, great. Let's talk a little bit about fundamentals across the different markets here. What is your guidance assuming at this point, and what are you seeing in the market in terms of underlying utilization trends, volume trends, practice revenue trends at the veterinary level? How much are you kind of paying attention to those trends and how much that impacts Zoetis and their business?
Yeah, look, we always pay attention to those trends. I think, particularly in the U.S., we have more of the data in front of us that we can look at, and certain other markets, it's a little bit less. But nonetheless, we do pay attention to those trends, and what we've been expecting to see is what we actually are seeing. There's about a flattened curve, if you will, on vet visits, but they remain slightly above where they were before the pandemic. And what's more important, and if you look at contribution to growth historically for the market, so the animal health market globally has grown somewhere between 5%-6%, with companion animals growing faster than that. And we're talking companion animal here when we're talking about clinic visits.
Even then, they've contributed about 1% growth year-over-year historically. This is a market overall that's grown 5%-6%, with companion animal growing even faster than that. What's driving the growth hasn't largely been the visits, but it is a contributor rather. It's been willingness to spend more and revenue continuing to climb, and we see that high single-digit growth in terms of revenue for clinics in the U.S., which is very healthy for the industry as well. Those dynamics we continue to watch, and we continue to see those being very favorable for our business, particularly as we look at companion animal, and we expect those to continue to drive.
Even in the face of uncertainty over the last year or two, we've seen growth across those markets, drive our business. In the second quarter, for example, vet visits were about flat, but we grew 9% operationally, with the U.S. growing 7% in the quarter. Again, we'll continue to see those types of vet performances as we look at the third quarter and so on.
And part of that's just greater utilization and sophistication of therapeutics, but also a little bit on price, too. I mean, how do you feel more broadly about your ability to take price and willingness to spend from a pet owner perspective? And in the U.K., more recently, one of the veterinary chains is under scrutiny from an antitrust perspective in terms of pricing. How does that, you know, resonate with kind of what you're seeing and hearing from your customer base?
Yeah, look, overall, we've proven that we're able to take price and continue to see volume growth in the business. So the ability to take price has existed for us previously, and we continue to see that. Historically, we've taken somewhere around two-three points per year. We've done that pretty consistently. And so vets and customers have gotten used to us consistently doing that. And this year, our price is a little bit higher than that, so about 4% in the second quarter, for example, but we saw 5% volume growth in that quarter as well. So we're seeing a good balance in the business, and we know we're able to take price. Now, it varies by product and by market. We're very deliberate and careful about how we do that.
We're consistent about taking price, and we see the ability to continue to do so. We'll get more specific about price for 2024 when we give guidance. And obviously, the last couple of years have been a little bit higher than our average, but only about a point or two. So we'll see where we landed, based on what we see there. But we don't have any concerns about our ability to take price, particularly as we continue to innovate, as well.
The four points there, this year is across the enterprise, right? From a production animal and companion animal perspective.
That's right. That's right. So you'd expect a little bit more on the companion animal side than the production animal side, but overall, in the aggregate, about four points on the second quarter.
Okay, so let's talk a little bit about livestock trends. Can you talk a little bit about where you're seeing strength from a species category standpoint, where you see that kind of going throughout the year? What's embedded in your expectations?
Yeah, livestock's gotten off to a to a really strong start for us. This year was 12% in the first quarter, 4% in the second. So on a blended basis, 8% on a year-to-date basis. But we expect it to come down, and we're expecting livestock globally to be in the low single digits growth, which is, you know, better than we've seen in the last couple of years. We're starting to see the effect of destocking minimizing on the overall business. Destocking had a strong second quarter, but that's a timing item given the timing of price adjustments we took last year. So we expect Q3 to be more of a headwind for destocking, for example, and for the overall livestock business, particularly in the U.S.
But still expecting to see, again, low single-digit growth, performance on the year. In terms of species, clearly, cattle is an important species for us globally and in the U.S. Herd sizes have come down, but it also changes the dynamics a little bit between producer and meat packing, et cetera. So we've actually seen cattle have a, again, strong start, on the year. Poultry has had growth across, the globe, and so we expect, to continue to see, see that. Swine in, in different markets, so, so we've seen some headwinds in swine for... In China, given some of the macro elements there. As well, we, we saw a higher disease burden last year, on swine, so that's had a little bit of an impact from a comp standpoint on us this year.
But across the other species, we've seen, we've seen growth across fish, for example, which clearly is Norway and Chile, mostly for us. And so that's been a very good contributor. Sheep across Australia has been a contributor, as well. And again, cattle's had a good run in the U.S., which is an important market.
Okay, can you talk a little bit more broadly about China? China has been a theme, I think, across this conference, with volatility for several different healthcare, healthcare constituents here. But can you talk a little bit about your business and what you're seeing in China, both from a companion and livestock perspective?
Yeah. So China remains an important market for us and will remain so long term. It's our either our second or third largest, depending on what you look at, if you look at Q2 versus year to date. But relatively speaking, it's still less than 5% of the overall Zoetis business, specifically. But we do look at China as well for the region. From a livestock standpoint, given tourism across the Southeast Asia region, China does have a bigger impact than just its 4%. And we factored all those into our thinking when we reaffirmed our operational guidance range. But we have seen some headwinds from a macro perspective in China starting, certainly in the second quarter, we saw that. We've seen confidence in terms of consumer confidence really come down.
They're saving a lot more. The savings rates are much higher. We've seen unemployment among the youth increase, et cetera. So we've seen a lot of these areas in terms of China as we exited the second quarter, and we expect those to continue in the back half of the year, but have factored those into our thinking, and we remain very confident in what we said about the rest of the year for the overall company. But China also has very strong comps in the second half for us. If you look at last year in the third and the fourth quarter, China grew, I think, 35% in the third quarter, I think 44% in the fourth.
Our companion animal, you asked about companion versus livestock, had an especially strong second half last year. I think we were up in 65% range in the third and fourth quarter last year. So these are very tough comps, plus the macro for China are things that we're watching and we talked about on the second quarter. It's not any different than what we talked about, and quite frankly, this is a phenomenon that not just us or industry, but other industries are facing as well with respect to China.
Okay, great. So switching gears to parasiticides, there's a recent competitor launch with a combination parasiticide competing alongside Simparica Trio. Any surprises since that launch at all, and what's your confidence in Simparica Trio improving in the second half from the 5% growth that we saw in the second quarter?
Yeah, look, we've been expecting competition here for quite some time. So parasiticides is the biggest market segment within our industry. It's north of $60 billion globally. The U.S. is a big proportion of that, about 2/3. And we've been expecting competition where we are the first to market, and we've had a three and a half year head start with a triple combination. And so we've made segment competition, and now we know that the first competitor to get an approval, they have a competitive label, but we do have a superior product and label against that, particularly when you think about a heartworm efficacy on the first dose, et cetera. So we do have that. We expect them to grow, but we also expect to grow.
We have expected that, and to your point about what's been surprising, nothing has really been a surprise to us in terms of what we expect. As the typical moves where you do fairly aggressive promotions, even on the existing products, to get, you know, shelf space and then swap them out. You know, those promotions ran longer, you know, perhaps because the timing of the approval was later than we thought. But, you know, nonetheless, we have a product that has very high satisfaction levels, with not only clinics, but also pet owners, has been in the market for again, three and a half years, really high penetration levels. We have autoship and, a great contract across corporates, et cetera, and a preferred product, et cetera.
So we feel good about where we stand and our ability to, to continue to drive growth, in this. And we expect the overall parasiticides segment long term, as we said on Investor Day, to grow somewhere in the 5%-6% range. Now, if you, if you look at that, that includes collars and topicals, which don't grow as fast. And so the end of the market where we're, effectively playing, which is orals, which includes our, Simparica product with fleas and ticks, but, our triple combination is also an oral product. That end of the market is going to continue to grow faster, and the triple combinations will grow faster than the overall oral segment. And so we, we expect to continue to benefit from that. But also outside the U.S., we've seen really strong growth.
I mean, Trio grew about 25% in the second quarter outside the U.S. And so, while it's not the same size of a market, we do see continuing room to grow, not only Trio, but our broad parasiticide portfolio, which is the broadest in the industry.
Where does your market share stand now in terms of parasiticides in the U.S.?
Look, we haven't quoted an exact market share percentage, but clearly, over the last few years, we've been gaining a lot of share in the market, since the launch of Trio, which Trio is now the biggest, number one product in the U.S. by revenue, and again, continues to grow. And by the way, we're expecting a strong growth quarter for Trio in the third quarter, again, despite the, the competition that we're talking about. So, yeah, we're in a great position again, not only with Trio, but, but the rest of our portfolio of parasiticides.
Talking about what's next in terms of parasiticides, a longer, longer-acting flea, tick, and heartworm injectable product, is that, you know, what should we be thinking about timing and magnitude in terms of launch of that type of product? And you know, what does the parasite- parasiticide landscape look like in, you know, three-five years?
Well, parasiticides, again, is the biggest market segment in our space, so... But it's also the most competitive, arguably, right? If you look at vaccines and parasiticides, almost every major player plays in those spaces, where there are areas that we have franchises that others may not necessarily be in. So we have a much broader overall portfolio, but it's a competitive space, so we'll continue to invest in that, from an innovation perspective. And as you said, injectables is certainly something that we can see in the future, not only for us, but others in the space. And I'm not going to get into timing considerations here, as far as when you might see those products.
There are some injectables in the space today, but when we're talking about getting more and more of the portfolio into long-acting injectables, those are areas that all of us are pursuing, and we'll continue to put our capabilities that we showcased on Investor Day behind those, as well.
Switching over to Librela. So you just started the early experience program. If you have any early initial thoughts, that would be great.
Sure.
With the broader launch in November, why are you doing that sort of cadence in terms of the launch process, and what did you learn from the international launch?
Yes. Look, we're certainly very excited about the launch of Librela in the U.S. Have seen obviously great performance and traction outside the U.S., across Europe and the other markets that we've launched this year. So we've had the same plan for Librela now for some time, and we're continuing to execute against that plan right on track. We said we would do an early experience program in September, and the reason for that and importance of it is, I think, you know, I look back and I look at human health versus animal health. You don't see a general practitioner injecting a monoclonal antibody on the human side. You go to a specialist for that.
But in animal health, we've had a track record with starting with Cytopoint over seven years ago, of having a monoclonal antibody as a mechanism to go after certain disease states. And we've gotten general practitioners very comfortable with that, but it starts with getting the product in the hands of the key opinion leaders, getting them to understand the timing, what the reaction initially on the injection site, how long before you start to see an impact, the safety profile, the efficacy and everything else. And as they do, they start to talk about it and advocate for the product, and general practitioners are more ready to take the product on even faster and ramp up even faster as a result of doing that.
So we're very big believers in the positive effects of doing an early experience program, which is why we said we would do that. And so that started already here in the month of September, and we'll continue to run that for a few weeks, and then we'll have the full launch after then, as you said, in the November timeframe. So continue to be very excited about the launch of this product and continue to see really strong performance outside the U.S.
It is going to be one of your bigger product launches that you've had. Do you have sufficient manufacturing capacity at this point from just a broader mAb perspective, especially what you have also in the pipeline, and what investments do you need to make around sort of the injectable space as well?
Oh, so look, we've been making these investments, mAbs, not just for Librela, but it's a platform that we have a number of substrates we talked about and showcased do an investor day. So we've been making investments both in terms of inventory to ramp up, and you've seen those play out in our numbers. If you look at our balance sheet, we've made, again, investments in terms of capacity to manufacture across the ABI, the Active Biological Ingredient, as well as the fill-finish end of the spectrum. And mAbs take longer to produce. If you look at it, it's somewhere around 10 months.
And so, preparing for a launch like this and preparing to make sure we're able to capitalize on the full market demand is why we've precisely made the timing that we've made all along, which is why it's been so consistent over the last almost one full year that we've been saying we're gonna do a launch late in the year to make sure that we ramp up the volumes and to be able to take advantage of the market when we do have that launch.
We are making those investments, and as you mentioned, for injectables as well, in terms of products that we're working on in our pipeline, so that at the right time, we make the right investments to make sure that we're able to run the pivotal trials off of the right capacity and scale, that will influence as well when we get a launch, how we're able to get those products out.
Atopic dermatitis, moving to that category, Apoquel, how are you thinking about lifecycle innovation in that space? As that category becomes more competitive, how are you positioning Apoquel, Cytopoint, and what's your kind of go-to-market strategy, and how does that change with new competitors coming in the market?
Well, key derm is an important market, product for us and franchise for us. You saw really strong growth in the second quarter. I think we grew by 14% in the second quarter globally. We've seen growth across the U.S. and outside the U.S. I look at it as key derm categorically, not just Apoquel, right? Cytopoint is one where we've seen really strong demand, and it, and demand has been there for some time, but we weren't able to fully capitalize on it because some of the inputs to manufacture mAbs was more limited previously. But now that we are, you're seeing some Cytopoint outpacing the growth even of Apoquel. In the second quarter, Cytopoint grew about 20% for us, which was about 15% or 16% volume.
And so you are seeing that strong, strong traction. I think we'll continue to see Cytopoint outpace the growth, but the overall franchise is important. But in terms of lifecycle and innovating in this space, we continue to do that. I think you can expect, just like you saw, the approval of Apoquel Chewable in the U.S. recently, and that's actually launching around the same timeframe as Librela in the U.S. for us. That's an important lever as we look at the evolving landscape. But now we have monoclonal antibodies. We have the film-coated, I call it traditional Apoquel products, as well as now the chewable products. So we have a number of levers that we can, we can play with. And then beyond that, we're looking at other species, label, new label claims, et cetera, across the franchise.
We continue to invest in lifecycle as well as many other innovation across the space, and we'll continue to do that as an important franchise for us.
I think lifecycle innovation is always an area that's underappreciated, kind of in animal health in general, 'cause that's a big component of the R&D spend, too. You have the parasiticides and the multibillion-dollar category there. You have atopic dermatitis, another billion-dollar category, another billion-dollar category coming up in Librela as well, but also renal was another area-
That's right.
-that you talked about, and that's another billion-dollar opportunity for you, too. So can you talk a little bit about that as well?
Yeah. So look, we, we did talk on Investor Day about a number of new areas that we're very excited about. Those will be potential next billion-dollar franchise areas for us as a company. And I won't update what we said there, but certainly, renal is one of those areas. We look at, you know, cardiovascular. We look at chronic kidney disease, we look at oncology. So lots of areas we continue to invest in, and we can go after those with different modalities, with mAbs, et cetera, depending on the disease state and what it calls for. So we're excited about all the work that we're doing across all these.
But lifecycle innovation is also important, as you said, and it's continuing to extend existing franchises and continuing to drive those across different geographies as well as, you know, different claims, et cetera. It gives us a lot of levers to pull on when we see competition in certain categories. But we feel very excited about all the work our and the capabilities of our of our R&D organization to continue to drive those.
Capital deployment, can you talk a little bit about kind of the opportunity to invest in certain smaller categories? I think you're very limited from a, from a larger transaction standpoint, from an antitrust perspective, but are there opportunities? Is there a pipeline? Are you looking at deals, or is that not as much a priority?
We're always looking at deals, and we're relatively active. But as you said, because of the big players in our space and the relative size, you start to bump into some antitrust there. And so, but there's still room to do tuck-in deals in our traditional businesses, if you go, for lack of a better term, like a Jurox acquisition that we closed just a year ago, in September last year. But you see more R&D deals coming through, for us, where we look at, not only tapping into our internal capabilities, but external innovation as well. So I think, you know, you'll continue to see that, but you see discipline, as well. We have ample, organic investment opportunities, as you saw with respect to what we're doing with R&D, very substantial increase in spending R&D year on year.
Plus, this year, on a year-to-date basis, is about 13%, but we expect that to be much higher for the full year. And so ample opportunity to invest internally, invest externally with respect to BD, including some R&D deals, and some that you've seen us announce and continue to execute on. And then we're also investing in our, you know, infrastructure, with respect to CapEx, to capitalize on the capacity that we need to drive the growth of products that are already in the pipeline and advancing or have been approved and are continuing to grow.
Okay, great. I got to about a quarter of my questions, but thank you so much. I appreciate it, and, yeah, thanks so much for your time.
Thanks for having me, Erin.