Good day, and welcome to the Q4 fiscal year 2019 financial results conference call and webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately 2 hours after the conclusion of this call via dial in or on the Investor Relations section of zoetis.com.
At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. It's now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.
Thank you, Keith. Good morning, everyone, and welcome to the Zoetis 4th quarter and full year 2019 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer and Glenn David, 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 statement 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.
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 the financial tables that accompany our
earnings press release and in the company's
8 ks filing dated today, February 13, 2020. We will also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.
Thank you, Steve. Good morning, everyone. By now, you've read our release and financial tables on the Zoetis website. So I'll take just a few minutes to recap the full year, talk about our outlook for 2020 and outline some of the long term investment plans and growth opportunities we see for Zoetis. Our CFO, Glenn David, will then cover the 4th quarter and our full year guidance for 2020 before we open the lines up for your questions.
So let's get started. Zoetis delivered another year of strong growth and market leadership in 2019. Thanks to our diverse and durable portfolio and our commitment to continuous innovation. We grew revenue 10% operationally, which includes about 2% of growth from the Abaxis acquisition. This is once again above the market growth for Animal Health, which is expected to be about 3% to 4% for 2019, reflecting the negative impact of African swine fever.
We grew our adjusted net income factor to revenue at 14% operationally, continuing to achieve our goal of growing profitability faster than revenue over the long term. In terms of other elements of our value proposition, we achieved several new approvals in areas that will strengthen our traditional portfolio of parasiticides and vaccines, and we invested in critical acquisitions and partnerships that will accelerate our growth in areas where we are expanding, such as diagnostics. For example, we received approvals for new parasiticides such as ProR12 in the U. S. And Simparica Trio in the EU and Canada.
We are enhancing our vaccine portfolio with new products like VersaCann plus BB oral, the first oral vaccine for dogs in Europe and pullback Preserta hvtNB, our first vector vaccine for poultry. We also continued to invest in building our overall diagnostics capabilities with acquisitions in the reference lab space, which will give us a more holistic offering to veterinarians. And we expanded our equine and pet care portfolio into nutritional formulas with the acquisition of Platinum Performance, a premier leader in this market. Finally, in terms of our commitment to returning excess capital to shareholders, we generated a 2019 quarterly dividend of $0.16 per share, an increase of 30% from the 2018 dividend rate, and we completed approximately $625,000,000 in share repurchases. We have built a strong record of delivering on this value proposition for shareholders over the last 7 years.
And I'm very confident we can continue on this path of long term growth and value creation based on the capabilities, colleagues and customer focus we bring to every market opportunity. Looking ahead now to the rest of 2020, animal health remains a steady and reliable market based on people's increasing commitment to their pet's health and based on the steady demand for safe and affordable animal proteins. For 2020, we currently expect the overall industry to return to growth of approximately 4% to 5%, excluding the impact of foreign currency. The market took a dramatic hit in 2019 from African swine fever in China, with at least a 50% reduction in herd size according to reports. While this disease had a significant impact on our business in China last year, we see early signs of stabilization and the opportunity for the industry in terms of farms consolidating, investments being made in better infrastructure and biosecurity and the frozen pork supply being reduced.
As the global pork market and trade picture sorts out more in 2020 and with increased export opportunities for many markets, we could see the overall animal health market return to slightly better growth rates. In terms of species, the swine market should be below the overall market growth for 2020. The companion animal and poultry markets are expected to be somewhat above the market growth and cattle is expected to be a little more limited than the market based on the continuing challenges faced by beef and dairy customers. For Zoetis, we expect to grow faster than the markets for companion animal and poultry and in line with the cattle market. For the swine market, we would expect to be in line or faster than the market depending on the pace of recovery from African swine fever and its impact on additional markets this year.
In terms of our guidance for 2020, Zoetis expects to grow revenue significantly faster than the industry in a range of 7% to 9.5% operationally. And in terms of adjusted net income, we expect operational growth in the range of 8% to 11%. To meet our goals for 2020, we will continue supporting our latest product launches and lifecycle innovations with direct to consumer advertising and the recently expanded pet care field force in the U. S. And in international markets, we're focused on supporting new products with field force expansions in certain markets and differentiating ourselves with a focus on direct field forces effectiveness and technical expertise.
We will also continue investing in other accelerated growth areas such as diagnostics, genetics, precision livestock farming and digital and data analytics. This will be an important year in diagnostics as we complete the integration of our systems and look to accelerate sales growth
with more
integrated offerings of medicines and diagnostics, an important way we can deliver more value to our customers. And we will continue advancing our pipeline with investments in parasiticides, vaccines, monoclonal antibodies and other therapeutic areas. The launch of Simparica Trio, our triple combination parasiticide is highly anticipated for 2020, and we remain confident in the U. S. Approval in the Q1 with a launch shortly thereafter.
As we have said recently, we completed the technical section of the Simparica Trio package for the U. S. And are currently in the administrative review awaiting a final approval. We have already received approval for Simparica Trio in the EU and Canada, and we expect the Simparica Trio launch in Europe begin in certain markets this month as we take a phased approach to the launch there. Based on these assumptions, we continue to expect to generate incremental global sales of Simparica Trio in 2020 at approximately $150,000,000 I am energized by the opportunities ahead of us in 2020.
We have a vibrant and growing companion animal portfolio, driven by internal innovation and more to come with Simparica Trio. We are delivering steady performance across our livestock products despite the market challenges some of our customers face from economic conditions, emerging infectious diseases and natural disasters. We're partnering with our customers in innovative ways to help them stay ahead of the curve on evolving technology, new commercial opportunities and shifts in consumer trends. We are building out our capabilities in digital and data analytics to bring meaningful solutions to the challenges facing their farms and clinics, and we are executing on a strategy for growth with internal and external investments that have us well positioned for long term growth. I look forward to carrying on the company's successful formula of customer focus, innovation and execution as we continue to deliver on our long term value proposition to shareholders.
Now, I'll hand things over to Glenn.
Thank you, Kristin, and good morning. As Kristin indicated, we had another exceptional year with revenue of $6,300,000,000 and adjusted net income of $1,800,000,000 with both top and bottom line exceeding the high end of our guidance ranges for the year. Reported revenue growth was 7% for the year, including a 3% unfavorable impact from foreign exchange, which was driven primarily by strengthening of the dollar against the euro, Brazilian real and Argentinean peso. Operational revenue growth of 10% was driven by a 2% price contribution and an 8% volume contribution. Volume growth included 2% from the addition of legacy Abaxis products, 2% from our key dermatology portfolio, 2% from new products and 2% from our other in line portfolio.
Revenue growth for the year was broad based with the U. S. Growing 11% and international growing 9% operationally. Companion animal led the way in terms of species growth outpacing livestock for the year. Revenue from our key dermatology portfolio, our diverse parasiticide portfolio with several new launches this year and legacy Abaxis products drove companion animal operational performance of 23%.
Livestock declined 1% operationally for the year, impacted by the outbreak of African swine fever in China and challenging beef and dairy cattle market conditions in the U. S. Our poultry and fish product portfolios continue to grow, partially offsetting the cattle and swine headwinds. Operational growth and adjusted net income of 14% was driven by strong revenue growth and gross margin favorability. Now moving on to our Q4 financial results.
We had solid performance again this quarter with revenue of $1,700,000,000 representing an increase of 7% on a reported basis and 9% operationally. Adjusted net income of $440,000,000 increased 15% on a reported basis and 13% operationally. Foreign exchange in the quarter drove an unfavorable 2% impact on revenue, primarily driven by the strengthening of the dollar against the euro, Brazilian real and Argentinian peso. Operational revenue growth of 9% for the quarter was driven by 1% price and 8% volume. The volume contribution of 8% includes 3% from new products, 3% from other in line products and 2% from key dermatology products.
Contributions from legacy Abaxis products were not a material driver of growth in the quarter globally since this is the 1st full quarter lapping the impact of the prior year acquisition. Breaking down our operational revenue growth by species, companion animal grew 19% and livestock grew 2%. Companion animal revenue growth was driven by continued strength of our key dermatology products and Doc Iris Siticide portfolio, including new products, Revolucin Plus and ProHawk 12 and the continued adoption of Simparica. Equine also contributed to growth in the quarter with a full quarter of revenue from the acquisition of Platinum Performance and its nutritional products, as well as continued growth of our core EQ Innovator vaccine. Livestock growth in the quarter was primarily driven by strong poultry and fish performance, partially offset by declines in cattle and the impact of African swine fever.
Swine increased 1% operationally in the quarter despite the impact of African swine fever. New products contributed 3% to overall growth in the quarter, driven by parasiticides Revolution Plus and Stronghold Plus as it's known internationally, Cohort 12 and the recently launched AlphaFlux parasiticide in Chile. Other in line products contributed 3% to growth in the quarter. This was primarily driven by revenue from recent acquisitions and commercial ingredients, including Platinum Performance, our reference lab acquisitions, the Stabilab diagnostic tests for equine and companion animal parasiticides, including Simparica. This growth was partially offset by declines in U.
S. Cattle and the ongoing impact of African swine fever. Simparica contributed strong growth in the quarter with revenue of $42,000,000 and 34% operational growth. For the full year, Simparica sales were $214,000,000 growing 40% operationally. Our key dermatology portfolio continued to grow globally this quarter, contributing 2% growth.
Global sales were $200,000,000 in the quarter, representing 29% operational growth. Full year revenue for this portfolio was $754,000,000 growing 29% operationally. The positive performance in this portfolio was driven by increasing market share, price and expanded usage of both Apicol and Cytopoint into recently launched markets. Sales from legacy Abaxis products were $68,000,000 in the quarter, representing 5% operational growth over the prior year. Now let's discuss the revenue growth by segment for the quarter.
U. S. Revenue grew 6% with companion animal growing 15% and livestock declining 3%. Companion animal growth in the quarter was driven by increased sales of our key dermatology products, the impact of recent acquisitions, our parasiticide portfolio and a number of other in line products, including Serenia and Rimadyl. U.
S. Dermatology sales were $133,000,000 for the quarter, growing 21%. Growth this quarter was driven by price and benefits from the direct to consumer advertising driving increased market share. Our parasiticide portfolio, including new products such as Revolution Plus and ProHeart 12 and in line products such as Simparica contributed to strong companion animal growth. Positive companion animal performance was partially offset by U.
S. Livestock declines in the quarter driven by cattle. Cattle product sales continued to be negatively impacted by unfavorable market conditions driven by heavier and healthier animals coming in from pasture with a lower risk profile and pricing pressure driven by competition. Partially offsetting challenges in cattle was continued poultry growth, primarily from our portfolio of alternatives to antibiotics and medicated feed additives. We also benefited from new customer adoption and competitors having product efficacy and supply challenges.
Swine also had a strong quarter, returning to growth due to increased sales of medicated feed additives and vaccines. To summarize U. S. Performance, innovation and returns on our investments drove positive results despite challenging market conditions impacting growth in cattle. Our International segment also contributed strong growth this quarter with operational revenue growth of 12%.
Companion animal operational revenue growth was 26% and livestock operational growth was 5%. Companion animal growth was driven by key dermatology products, growth in our parasiticide portfolio, including Simparica and our Stronghold franchise and legacy Abaxis products. International Livestock also performed well, driven by growth in cattle, fish and poultry. This growth was partially offset by modest declines in swine due to the ongoing impact of African swine fever. Growth in cattle is due to favorable pricing as well as increased feedlot placements in Australia, new customers in other developed and emerging markets and favorable conditions in key markets such as Mexico.
The fish portfolio benefited from the continued uptake of the alfaflux parasiticide in Chile, while poultry growth was driven by price and increased sales of vaccines. As expected, swine remained challenged this quarter by the ongoing impact of African swine fever. We did see some positive signs, however, partially offsetting these declines with new markets launching our combination swine vaccines and growth in kid accounts in China. Our outlook for 2020 remains neutral to slightly positive for swine in China.
In the
near term, however, we remain confident that other regions and proteins will increase production to help mitigate the pork shortage and long term industrialization of pork production in China will be a tailwind. Overall, our international segment continued to be a significant driver of growth, supported by innovation and a diverse portfolio across products and geographies despite the impact of African swine fever. Now moving on to the rest of the P and L. Adjusted gross margin of 68.5% increased approximately 210 basis points in the quarter on a reported basis compared to the prior year. The increase was driven by foreign exchange, manufacturing cost efficiencies, product mix and price, partially offset by increased inventory charges.
Total adjusted operating expenses grew 13% operationally. The increase is primarily related to compensation related expenses, the impact of recent acquisitions, direct to consumer advertising and investments to support future growth of the business. The adjusted effective tax rate for the quarter was 14.2%. The decrease from the comparable 2018 period is primarily related to non recurring discrete tax benefits recorded in the Q4 of 2019, partially offset by the impact of the global intangible low tax income or GILTI tax, which is effective for Zoetis in 2019. Adjusted net income for the quarter grew 13% operationally, driven by strong revenue growth, favorability in gross margin and a lower effective tax rate.
Adjusted diluted EPS grew 14% operationally compared to the same quarter in the prior year. Now moving on to guidance for 2020. Please note that guidance reflects foreign exchange rates as of late January. In 2020, we are projecting revenue between $6,650,000,000 $6,800,000,000 representing 7% to 9.5 percent operational growth. Foreign exchange is expected to be a headwind again next year of approximately 100 basis points.
Innovation will be a key driver of growth next year, particularly in companion animal. Companion animal overall is expected to again outpace livestock, benefiting from our diverse parasiticide portfolio, key dermatology, diagnostics and strong market dynamics, including continued growth in emerging markets. And as Tristan mentioned, our guidance assumes an incremental $150,000,000 in revenue related to Simparica Trio. This estimate represents revenue for roughly 3 quarters of the year. And in 2020, as Kristen indicated, we anticipate all livestock species returning to global growth.
From a geographic perspective, we anticipate balanced growth between our U. S. And international segments. Adjusted cost of sales as a percentage of revenue is expected to be in the range of 30% to 31%, neutral to slightly increasing from 2019 due to unfavorable foreign exchange and mild dilutive acquisitions, partially offset by price and positive mix. Adjusted SG and A expenses for the year are expected to be between $1,590,000,000 $1,640,000,000 with the increase over 2019 focused on critical areas of revenue growth, including recent and future product launches, recent acquisitions and expansion into reference lab diagnostics, as well as the annualization of our U.
S. Field force expansion and direct to consumer advertising. Adjusted R and D expenses for 2020 are expected to be between $455,000,000 $475,000,000 consistent with our commitment to invest in pipeline opportunities, both lifecycle and novel new therapies. Going into 2020, investment will be focused on delivering the next wave of high value innovation, including monoclonal antibody therapies for osteoarthritis, pain in cats and dogs and new vaccines for poultry. We're also investing in strategic areas of focus such as diagnostics, bio devices and precision livestock farming and strategies to maximize the value of the continuum of care through integrated offerings.
Adjusted interest and other income deductions is expected to be approximately $215,000,000 with the increase over 2019 driven by reduced royalty income as well as lower interest income. Our adjusted effective tax rate for 2020 is expected to be in the range of 20% to 21%. The increase in 2020 is related to the impact of favorable non recurring discrete items that occurred in 2019. Adjusted net income is expected to be in the range of $1,865,000,000 to $1,915,000,000 representing operational growth of 8% to 11%. We remain committed to our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue.
However, as I highlighted, growth in adjusted net income in 2020 will be negatively impacted by the higher effective tax rate, limited gross margin expansion and strategic investments. For context, the higher effective tax rate in 2020 will negatively impact our adjusted net income growth by approximately 300 basis points. Consistent with 2019, we are anticipating elevated capital expenditures in 2020 to support investments in manufacturing focused on internal capacity increases and facilities to support pipeline opportunities. We're also investing in information technology to support our recent acquisitions as well as digital capabilities and data analytics. We're also committed to our capital allocation priority of returning excess cash to shareholders that isn't deployed internally or for business development opportunities.
To that end, we recently announced a 22% increase in our dividend and we have approximately $1,700,000,000 remaining under our multiyear share repurchase program after repurchasing approximately $625,000,000 in Zoetis shares in 2019. Finally, we expect adjusted diluted EPS to be in the range of $3.90 to $4 and reported diluted EPS to be in the range of $3.53 to $3.65 While our guidance represents full year expectations, we do anticipate Q1 to be slightly weaker in terms of revenue with limited growth in adjusted net income due to the timing of this entire Cattrillo launch and the investment required to support the launch and recent acquisitions. Now to summarize before we move to Q and A, 2019 was another exceptional year in which we delivered 10% operational revenue growth and 14% operational growth in adjusted net income. Our guidance for 2020 underscores our ability to grow revenue organically well above the market and grow adjusted net income faster than revenue. And our focus remains on delivering long term shareholder value through disciplined internal and external investments and returning excess cash to shareholders.
Now, I'll hand things over to the operator to open the line for your questions. Operator?
Thank you. We'll take our first question from Louise Chen with Cantor Fitzgerald. Please go ahead.
Hi, thanks for taking my questions and congratulations on the quarter and twenty 20 guidance. My question for you is, if you could provide more color on the headwinds and tailwinds in the macro outlook for Animal Health in 2020? Thank you. Sure. Good morning, Louise.
Good to hear from you. As we talked about, the overall market for 2020 in Animal Health is projected to grow at 40% to 5%. Probably faster than that will be companion animal as we've seen in previous years. As we think about where the wetness is coming in, we believe we'll grow faster than that market, really driven by our innovation. Obviously, we've given guidance around the excitement around Simparica Trio, our Para is our derm portfolio.
We see poultry growing faster than the market as well and Zoetis growing faster than the market as well. We have some launches there as well as the portfolio we have in poultry to help raise no antibiotics ever. We see cattle returning to growth in 2020, albeit slower than the overall market, and we see Zoet is probably growing in line with the market overall. And swine, we see returning to growth as well in 2020, and Zoet is growing in line or faster. So as we see some of the headwinds, they'll remain innovation overall as well as sort of a return to growth for livestock in general.
Thanks, Louise.
And we'll take our next question from Jon Block with Stifel. Please go ahead.
Great. Thanks guys. Good morning. I'll ask both upfront. You mentioned launching the Trio in Europe later this month.
I guess anything you're willing to share on price of Trio or positioning in the market? In other words, what you guys can do to try to get at the incremental revenue from the top 2 oral flea and tick products versus call it just partially cannibalizing Simparica? And then Glenn one for you, when I look at that 2020 guide, it seems like revenue is certainly ahead. The adjusted interest expense was above expectations. I think you alluded to less royalty income.
What about just from a cash flow perspective? In other words, in the guide, is there any assumed buyback or pay down of debt in there? Thanks for your time, guys.
Sure. Thanks, John. I'll take the first and I'll let Glenn take the second question. We are expecting to be launching commercial launch in Europe in a few markets this month. We will do a staged launch.
So Italy, Spain and the UK are launching this month in Europe. We are not first to market, as many of you know, in Europe. There are other products on the market. So to your point, it is a competitive position. We will be pricing, as we've spoken about before, at a premium to Simparica overall.
And really, as we look back at the competitive side, it actually varies dramatically in Europe by market with the different competitive products on the market overall. We remain excited for approval in Q1 in the as is customer and as we've spoken about in other product launches, probably 6 to 8 weeks after that. And in the U. S. That we've spoken about, we should be first to market.
Again, we'll plan to launch at a price premium to Simparica, but at a discount probably overall, if you look at it from the two products there, We're focused very hard in the U. S. And gaining share. So we haven't gotten specific on overall pricing, but it should be at a significant premium to Simparica today, But we haven't fully launched in the U. S, so our pricing is not public yet in the U.
S. So I'll let Glenn take the second question.
Sure. From a revenue perspective, we're very excited about the expectations for revenue growth this year with growth of 7% to 9.5% and obviously very excited about Simparica Trio as well. In terms of the bottom line growth of the 8% to 11%, a little less of a differential from revenue than we typically expect, a lot of that being driven by the impact of the tax rate change year over year. Accounting for that impact, we have about another 300 basis point impact of growth at the bottom line. And also foreign exchange was negatively impacting us in terms of adjusted net income absolute number, and that was about 200 basis point negative impact from foreign exchange.
Specifically to your questions, there is no assumed payback or paydown of debt. And in terms of share repurchase, the number of shares that we assume in our EPS are the shares ending as of the end of December 2019.
We'll take our next question from Michael Ryskin with Bank of America. Please go ahead.
Thanks guys. Just thinking on the trio to round out those set of questions. You've been talking about it for a while obviously on the conference calls and early this year at VMX, we saw a pretty significant presence from you on the field. Have you seen any response from your competitors ahead of the launch in terms of either stuffing the channel or giving any promotions with the Spectra product in Europe or even with a standalone product in the U. S, taking any price actions or any combo or bundling actions in the U.
S. To try to get ahead of the March launch as vets stock up in the Q1? And then just on the same line follow-up, what's your expectation for Trio impact on gross margins? Chris, just following up on your comments on how it's priced. And obviously, you have the API component of 2 different drugs in there.
So net net, what's going to be the impact on gross margins in 2020 and then even in the out years as volume ramps from the Trio product?
Sure. Thanks so much, Mike. This is the single biggest category in animal health, a companional parasiticides. So it is a highly competitive space to exactly your point. It's a $4,000,000,000 market in the U.
S. Alone. It's $2,500,000,000 So we are expecting a significant competitive response. This is a category that a lot of people will defend. We would expect normal tactics, obviously, trying to set the channels or fill in and fill up the shelves as best they can.
We're certainly expecting some of them to look at pricing programs. But we think there's significant excitement around the opportunity for Triple in the U. S. We've certainly heard it. We did not, as you saw at BMX, we were not we didn't have approval on this product.
So we were not promoting this product at VMX, but there's a definite understanding that Triple is coming from us. I think customers are anticipating that and are very excited to have something new and innovative to share with their customers. So I think we're expecting whatever you normally see in a competitive response, but this is a major category. So our plans for launch, our revenue guidance we provided was anticipating a significant competitive response in this area overall. So I'll turn it over to Glenn to take the gross margin implications on Trio.
Yes. In terms of the impact on gross margin, for 2020, we expect it to be mildly beneficial to our overall gross margin. Obviously, as time goes on and we become more efficient in the production or operating at full capacity, we do expect this to be a higher margin product for us and it will benefit our gross margin over time as we move beyond 2020. Thanks, Ricky.
Our next question is from Erin Wright with Credit Suisse. Please go ahead.
Great, thanks. Can you give us an update on the diagnostic strategy at this point? Do you expect continued inorganic activity in reference labs, both U. S. And globally?
And or is it more of an organic build at this point? And can you speak to some of the success you're seeing already in the bundling across the portfolio between therapeutics and diagnostics? And then separate question on stocking. Were there any stocking dynamics worth noting in the quarter? And we anticipate distributor stocking in the 1st or the second quarter for Simparica Trio?
I guess I just want to make sure we're thinking about the quarterly appropriately there. Thanks.
Sure. I'll take Trio first. In Europe, we obviously did begin shipping in Europe to customers there. So you will see some stocking in Q1 there. In Q2, it will depend on exact timing, but there could be some shipments obviously in Q1.
It's too early until we have an approval, as we said before, we won't be able to get very specific. But we're discussing weeks here and it just happens to be the timing in Q1. So it's hard to give you an exact guidance. But if you look at the $150,000,000 guidance we gave you, it's assuming we're selling for 3 quarters of the year. So there could be stocking, obviously.
But back to the diagnostic strategy overall, we remain very excited at diagnostics. For starters, it's a market growing at around 10% per year, so it's quite attractive. It continues to also drive use of our therapeutics and preventatives, so it's exciting. So we look as we look into 2020, we're looking for double digit growth overall in Zoetis' diagnostics portfolio, both in the U. S.
And abroad. We've spoken a lot about our point of care strategy. We're really focused there on increasing placements as well as driving consumable use. As you look at the reference lab strategy, we have made a number of BD deals over the last 3 or 4 months in the U. S.
Specifically. These are small deals as you've seen, but we're looking to build a network. This will be in the U. S, a lot of organic build from there, scaling the sites we have today, looking at some spoke sites as well. But I think you will see some BD as we look to grow into international.
So this will continue to be a mix of organic and inorganic. But again, very focused on ROI. We don't see these as significant deals right now. We're looking at continuing to grow this over time, but great excitement. If you look at sort of some of our excitement ending 2019 and moving into 2020, we've been leveraging our Freedom Flex program, which combines and offers opportunities across our core portfolio in diagnostics and are very excited to add in Refnflat into that opportunity as we look into 2020.
And Aaron, just to add to the comments on the quarterly when we look at the overall progression of revenue for the company, we would expect Q1 to be slightly lower in terms of overall growth. And then because of the investments that we're making in Q1 to support the launch of Cheerio as well as some other strategic investments, we'd expect income to be relatively flat or to low single digits.
Our next question comes from John Kreger with William Blair. Please go ahead.
Hi, thanks very much. Kristen, can you just give us an update on the monoclonal products that you're talking about in cats and dogs? Where does that stand from a regulatory standpoint? And do you think they could be notable contributors in 2021? Or is that more of a kind of
a late year launch event? Thank you.
Sure. In our Q2 2019 guidance, we indicated we had filed in both the EU and U. S. And we're expecting approval in 2021. It is obviously too early for us to be terribly specific as these regulatory views, if we wish we could predict with that level of precision.
So it's probably a little early to be able to say whether or not we have sales in 2021 or 2022. But these would be the first mAbs reviewed by the FDA. So we want to make sure we give them adequate time and we have less understanding of exactly how fast that will be. But we continue to be very excited. As we've spoken about before, pain in cats is really there are no products today that adequately serve that market.
So there's a lot of excitement as well as for the canine. So when we have more information there, we're happy to provide it, but we remain excited.
Our next question is from Chris Schott with JPMorgan. Please go ahead.
Great. Thanks very much for the questions. Just 2 here. First on the reference lab and organic build in the U. S.
From here. Just give us some sense of how long you envision that taking to fully build out your network and portfolio in terms of when this becomes, I guess, a bigger piece of the offering? My second question was just on the gross margin dynamics in 2020. It seems like we have kind of mix going in your favor with the growth in companion, yet I think the guidance is suggesting flat to slightly declining gross margins. Just a little bit more color of what's happening there.
And longer term, is it fair to still think about gross margin improvements as we see that companion pipeline continuing to ramp over time? Thanks very much.
Sure. Thanks, Chris. I'll take the first question and Gwen can take the second. If you look at reference lab build in the U. S, we think this is multiple years.
We look to scale in geographic as we've talked about. ReferenceLab, given the importance of logistics in ReferenceLab, it is an MSA by MSA market. And we're very focused on doing this and making sure we scale the sites that we open. So we do believe this will take a number of years before we'll have a significant presence in the U. S.
I would say the same for international, it will be a buy and build. So to your point, I don't think this is something you're going to see really be a significant player within the next 12 months. But we're very excited about the long term growth and scaling in the markets we've entered and then adding spokes there. But I'll turn it over to Glenn to take the gross margin in 2020 and beyond questions.
Yes. So in terms of gross margins, so stepping back to 2019, right, we benefited significantly from foreign exchange in 2019 to the tune of about 120 basis points. As we move into 2020, that impact of FX turns the other direction. We have approximately about a negative 50 basis point impact from foreign exchange on gross margin in 2020. So that offsets some of the favorability that we're seeing, a, from price but also from mix from a companion animal perspective.
The other thing we need to take into account is some of the acquisitions that we have completed, Reference Labs in particular and Diagnostics, they do come in at a slower or lower gross margin. So that offsets some of the mix variability that we see from companion animal. Over time, we do anticipate that we'll continue to see gross margin improvements driven by the completion of our supply network strategy as well as from continued improvements in price and to the extent that companion animal continues to grow faster than livestock that will benefit our margin.
Thanks, Chris.
The next question is from Kathy Miner with Cowen and Company. Please go ahead.
Thank you. Just one question. Could you comment on your China business? A little more specifically, give us color for the Q4? And also how do you see the coronavirus impacting both business and your outlook for African swine fever?
Thank you. Sure. I'll start on corona and then I'll let Glenn get more into specifics of performance in 2019 expectations. As everyone is watching, the coronavirus is obviously emerging very quickly in the sense of certainly the news overnight. As we look at our business right now, it's probably too early to tell exactly what the impact will be, but let me talk a little bit about some of the risks that we're watching.
First is just an overall economic slowdown, which is already driving some reduced overall consumption in animal protein. As you've seen, some of the hardest hit markets are hospitality and travel. So without that, there's a number of people obviously not eating protein. So it should affect consumption a little bit. How long this lasts will really impact whether or not that's a significant driver or not.
There's obviously some commercial risks. Many of our fields are not able to get out to veterinarians and many pet owners are not currently bringing their pets to veterinarians giving some of the quarantine, but as quarantines lift or as that emerges, we'll watch that. We're obviously watching our supply chain. We do have a number of MFA sorry, APIs or active pharmaceutical ingredients that are produced in China for the world. We're very confident with most of those that we have adequate supply in multiple months.
So even if the ports did shut down, we should be fine unless that wasn't extended. The ports are still open and they are still shipping. So we don't see right now at the moment any impact to our overall supply chain. We'll continue to monitor this. Obviously, last year, the big impact was ASF, which we did see either flattening or returning to growth in China, but obviously that will be subject to the ability to continue to move both feed around China as well as animal protein.
So it's a little earlier to tell, but hopefully that gives you a sense of some of the issues that we're tracking to get a sense. But it remains a significant market. I'll let Glenn sort of talk about performance and expectations for China overall.
Yes. So when you look at China overall, I'll start with the full year and then talk a little bit about Q4. But China for full year 2019 was about $200,000,000 in revenue, which was essentially flat to the prior year, which is pretty impressive performance considering the impact of African swine fever, which we estimate to be greater than $50,000,000 in 2019. That was really driven by rapid growth in companion animal. Companion animal now represents more than 50% of the overall revenue in China and has grown very rapidly.
The market performed very well even in the challenges of African swine fever. And I think you saw some of that particularly in Q4 where we saw 10% growth in China in Q4 on an operational perspective even with a negative $11,000,000 impact from African swine fever.
The next question is from David Westenberg with Guggenheim Securities. Please go ahead.
Hi, thanks for taking the questions and congrats on a good quarter. So your competitor, one of the largest competitors in diagnostics has historically spent 3 or 4 times the amount on R and D versus Abaxis. In order to close the competitive gap, do you think it simply requires scaling or do you think that you need to actually close the R and D gap longer term? And then just sticking with diagnostics with the acquisitions in Reference Lab, What kind of safeguards are in place do you have to make sure that your sales force remains focused on selling your products with such a wide product bag? Thank you.
Sure. Thanks, David. So with your first question, I'm not sure I know that there's a number of reports out on R and D versus IDEXX versus Zoetis. We have significant investments in R and D in our diagnostics portfolio. So I don't think we're looking at any incremental spending to close any perceived innovation or R and D gap there.
As you remember, part of diagnostics, those are a core part of how we even develop the products we develop today, making sure that we can diagnose the diseases that we create treatments for. So we remain very confident in our R and D spend and the percentage of it dedicated to diagnostics and see significant synergies from an R and D perspective between our core portfolio of medicines, vaccines, etcetera, with diagnostics. So no, we don't see that. As we look at the field force, we actually again, like to be solution selling as we've spoken about. So we go in and talk about a wellness visit of which diagnostic is a role.
If we need to if we're looking to place new instruments or sign up somebody on a new reference lab offering, we bring in specialists, diagnostic specialists to do that. And then we have diagnostics technical specialists who come in and maintain that equipment. So we do not believe this is distracting at all. We do believe once you place that equipment that our core representatives and strategic account managers can really help drive consumable use as they talk about a wellness visit and how they can combine looking at vaccines, preventatives and doing wellness screening and diagnostics. So we think it's actually quite synergistic and we have experts that come in to sort of help on focus sales and placement of new equipment as well as in reference lab.
So no, we don't see that as a big challenge.
We'll take our next question from David Risinger with Morgan Stanley. Please go ahead. Great. Thank you very much and congrats, Kristen, to a very nice start to your new role as CEO. I wanted to just get a little bit better understanding of the finalization of the Simparica Trio approval.
So what needs to be done at this point? I know that you're highly confident that it's imminent, but what steps need to take place? And then I believe that you mentioned that you'll wait 6 to 8 weeks after the approval to launch. And could you just explain that I would have expected the launch to come much more quickly after the approval given that it's highly anticipated. Thank you.
Sure. I'll let Glenn take some of the specific details here.
Yes. So in terms of the Simparica treatment approval, as we said, we're in an administrative review period. All the technical sections are complete. So we're just awaiting final response from the regulators at this point in time. In terms of the timeframe of 6 to 8 weeks from approval to launch, that's pretty typical within the industry.
There are a number of things that need to occur. You need to find a label. You need to complete packaging of the product. You need to make sure you're building up the appropriate launch quality. Obviously, we're doing that every day and we're looking to minimize that time of a 6 to 8 week period, but that is very typical within the industry from terms of approval to launch based on the activities that need to occur post approval.
The next question is from Gregg Gilbert with SunTrust. Please go ahead.
Thanks. First back to ASF. Kristen, has your thinking changed at all in terms of the overall impact of ASF and when that impact will begin to abate? And then Glenn, can you talk about how much growth you're factoring in for the derm portfolio in 2020? And maybe comment bigger picture on what inning you think we're in, in terms of realizing global peak sales for that portfolio?
Thanks.
Sure. Thanks, Greg. I'll start with ASF. We do think it's the overall impact based on what we know today is leveling out in China. The real question is how fast will they rebuild the herds in China and how will China overall meet its animal consumption demand.
So as we sort of see it, as we talked a little bit, we do think in China specifically, you'll see flat to low single digit growth in our pork business there. I think you'll slowly see some of the more innovative technologically advanced industrialized production start with very strong biosecurity. You're starting to see some signs of this, but it's in fits and starts and it's a little hard right now with corona to understand how fast that will really evolve. But I think if you look at the broader impact of African swine fever, they are going to need to feed their people even if consumption is a little bit down. So I think you're going to see the impact of African swine fever in countries like Brazil, the U.
S. And EU as they look to meet that demand. There's been a little volatility obviously given corona and pork prices more recently, but overall they've been trending up. This will encourage producers to raise more pigs, raise heavier pigs. We are seeing significant increases in exports at least in the U.
S. Already and Brazil into China. So I think you'll see that, which is one of the, we believe, the drivers of why, as we said, we think live overall across species will return to growth in 2020 because China will either have to beat their population, some will come from internal, but they will need significant imports into China and that will continue to come from Brazil, the U. S. And the EU, both in pork, but we're also seeing potential opportunities in both poultry and beef.
I'll let Glenn take the second question. On derm growth.
Yes. In terms of derm growth, A, just looking back at 2019, a really strong year for the derm portfolio in 2019. We grew 29% operationally, U. S. Growing 25% and international growing 38%.
We'd expect to have continued growth in 2020, not to that level as we're working off of a higher base, but the areas that we expect to see growth. A, international, we expect international to continue to outpace the U. S. In terms of growth just because currently the mix of the revenue between U. S.
And international is about 2 thirds U. S, 1 third international, although the number of medicalized dogs is pretty much equivalent between the 2. So we would expect to gain market share in international as vets get more and more comfortable with the products internationally. And the U. S.
Has had the advantage of direct to consumer advertising, which is not available in all international markets. From the U. S. Perspective, we continue to see opportunity in terms of continuing to expand the market, continuing to expand the usage into acute patients, and we do expect to continue to get price in the U. S.
As well. So we see 2020 as being another year of growth for the derm portfolio. But as the portfolio continues to mature, the pace of growth will slow.
The next question is from David Jacob with UBS. Please go ahead.
Hi. This is Bhakar Agrawal on behalf of Naveen. So thanks for taking our questions. My first question is on the long term opportunity for Simparica Trio. In the parasiticide space, the switch from topicals to oral was quite significant at greater than 70%.
So do you think this switch is a good analog for how much share could be switched over from the doublet to the triplet class? Or are we missing any dynamic? And secondly, on your alsaflex vaccine, do you have plans to launch this vaccine in Norway as well? And could you frame the market opportunity for this vaccine? Thank you.
Sure. I'll start with the first one and I'll let Gwen take the second one. So if you look at the long term opportunity for Trio, it's obviously significant. As we talked about, it's the single largest category in companion animal and certainly overall. It's a highly competitive category as well.
So we're very excited. We think that we will gain share as we think about the $150,000,000 incremental for 2020. The assumption in that overall is we do not have competition in the U. S. In that year.
It is already obviously competitive space in many markets outside the U. S. We think we'll get a movement obviously from some from OTC. We think we'll certainly see some cannibalization that we've spoken about from Simparica, but we also think it will take some of the other orals in the market overall. So I'm not sure that the switch from topical to oral is necessarily the best overall proxy.
And part of the long term opportunity for Trea will also depend on our label versus the label of potential other competitors that come to the market, as well as the distance between our launch and their launch. I know the favorite question is, what are we expecting a competitor? As you know, in our space, there's very little information available As one of those is a private company and the other one does not disclose. So at the moment, we believe we'll be the only product on in the U. S.
In 2020 and that is part of the assumption on the 150. But the longer we are, the greater the opportunity to gain share overall. We continue to see this as a significant innovation for both the pet owner and the vet and a lot of excitement around it. So we'll be investing significantly in that. I'll turn it over to Glenn a little bit on Alphamax.
Yes. So in terms of the fish portfolio for Q4, we saw very strong growth at 17% and Alphaflux was a key contributor to that growth in the quarter, particularly in Chile. There is already a similar product on the market in Norway, so that would not be an incremental opportunity in terms of launching a new product in Norway. As we look into 2020, we continue to see the fish portfolio growing. There may be some limitation in terms of the number of salmon available to treat based on certain regulations, but we still see fish as a rapidly growing species for us in 2020.
The next question is from Elliot Wilbur with Raymond James. Please go ahead.
Thanks. Good morning. First question for Kristen. Just want to ask you about longer term R and D investment at the midpoint of the guide for 2020. On a percentage basis, guidance would have you coming in below 7% and that number has trended down.
On a relative basis last couple of years, obviously, if you enjoyed strong growth, but as you think about driving or the need to invest to really drive more innovation, is a sub-seven percent R and D investment ratio sustainable? Or should we expect that to increase perhaps as we start to see the top line decelerate a little bit next couple of years. Just a quick follow-up for Glenn. You mentioned the lower gross margin profile of the diagnostic businesses. But as we think about modeling segment margins, I would also presume that on an operating income basis, those businesses also have lower margins, but I want to confirm that.
Thanks.
Sure. Thanks, Elliot. On long term R and D investment, we look every year at the portfolio of opportunities and innovation that we have ahead of us and invest based on where we see those opportunities. It does fluctuate a little bit year to year. It's been growing, I think, faster than our overall SG and A, not necessarily always at revenue growth.
We are we've, I think, made very strong investments. And if we see opportunities, we're more than happy to increase that R and D investment and have done so certainly quarter to quarter year to year. But we are confident that the spend around where we are again, you should expect fluctuations year to year based on opportunities. Some of these studies can, especially in livestock, when you move them, they can drive significant costs year to year. But we are very confident that we have the right level of spend to drive our value proposition of significant top line growth at or faster than the market long term in what we've provided overall.
I'll see if Glenn wants to add anything to that and if he can take the second question.
Yes. So in terms of the question on operating margins for Diagnostics, so gross margins will be lower over the long period of time for Diagnostics. However, when you look at operating margin, obviously, right now, we're in the build phase, so it's a little lower than our overall business. But as we progress in over the next number of years, with the ability to leverage our commercial infrastructure, we do see the operating margins for diagnostics coming very close to our core portfolio as well.
The next question is from Balaji Prasad with Barclays. Please go ahead.
Hi, good morning and thanks for the questions. So a couple of questions on the poultry side. 1, Christy, you spoke about your competitors had efficacy and supply challenges in the quarter. What can you throw some more light on what were these challenges and how prolonged do you think this could be? And for 2020, would you still have been able to grow faster than market if these dislocations did not exist?
Secondly, could you also throw some light on the market opportunity for vector vaccines and how should we think about the portfolio on revenue ramp from this segment?
Sure. I'll let Glenn take these.
Yes. So in terms of the poultry outlook, so a, this year, we had very strong performance in poultry. We grew 10% for the year globally in poultry. And we see 2020 as being another very positive year for poultry growing much faster than the overall market and with our portfolio continuing to outpace the market. In terms of the vector vaccines, in 2019, we launched our 1st vector vaccine.
That really set the stage for us from an R and D perspective to continue to develop more and more vaccines over the next number of years for those to become a bigger section of our portfolio. And we do see poultry continuing to be a rapidly growing market, and we'll continue to invest in our R and D for that market.
Next question is from Nathan Rich with Goldman Sachs. Please go ahead.
Thanks for
the questions. Just two quick ones on diagnostics. You talked about double digit revenue growth in 2020. Could you just maybe help us think about how much of the contribution you expect from the through ReferenceLab deals that you've done and what you're kind of expecting for organic growth kind of ex those deals? And then Glenn, I think you mentioned ReferenceLab being a drag on margins gross margins in 20 20.
Could you maybe just give us some sense of magnitude and help us kind of get a better picture of what you're expecting for margins for the underlying business? Thank you.
Sure. I'll take the first. Obviously, if you look at Diagnostics overall, to be clear, we're expecting double digit growth in our core point of care as a way to diagnostics. That's not being driven by reference lab. Reference lab would be incremental to that.
It's again, I want to emphasize, still a pretty small part of our overall portfolio in the U. S, but we are expecting double digit growth in both the U. S. And in international in the point of care space. But I'll let Glenn talk a little bit more about gross margin overall on diagnostics.
Yes.
From a gross margin perspective, again, overall on diagnostics, as we are expecting rapid growth in that area, it will be a negative driver of our overall gross margin as those products tend to be of a lower gross margin profile. When you look at the overall EPS impact, particularly to your question on reference labs, reference labs in 2020 is about a negative 0.03 dollars to 0.04 dollars impact on our overall EPS based on the investments we're making to grow that business for the future.
The next question is from Kevin Ellich with ACE Research. Please go ahead.
Good morning. Hey, guys. So a lot of my questions have been asked, but just wanted to see if you could provide a little bit more detail on what you're doing in the digital and data analytics and when we could see some material impacts on those initiatives? Thanks.
Sure. Thanks, Kevin. Digital and data analytics obviously is an important strategy of the company. It's one of our 5 priorities as we move into 2020. I would say there's 2 components to that.
1 is leveraging digital and data to drive greater sales of our core business. So that's really focused around better targeting our customers, providing more personalized and customized solutions to them. So leveraging the data we have to better understand how they operate their business, what products would be most attractive, what offers would be most attractive to them. So I think that will that's already in place and I think we're doing a very strong job both in the U. S.
And international of leveraging some of those capabilities to drive our core business. We also see that opportunity in both pet care and livestock to create new revenue generating solutions. Some of that on the pet care side will be around overall diagnostics opportunities and linking those opportunities to our core portfolio and providing incremental insights to our customers. In livestock, that remains as well around both our genetics portfolio as well as our precision livestock farming, which we see as a significant growth driver for us in the medium to long term. I think if you look at both consumer preferences and where the industry is moving, it's moving more to individualized animal care.
So solutions such as what we have with SmartCo, which is ear tags for dairy cattle and better understanding the health and the productivity aspects of animals, individual animals and helping producers and veterinarians make better decisions in the short term is an opportunity. As we link that to both our genetics business, which is you can also predict which animals will be born healthier and will have a better productivity. And then we see in the medium term the opportunity to link that as well to our diagnostics and really provide both veterinarians, producers and consumers with better understanding and better health for animals. So we think this will help drive our business. As we see some of those, as you saw, are more short term opportunities, some are more medium term.
And then think about the connection between all three genetics, precision livestock, data and our core portfolio and diagnostics, that's probably more in the medium to long term.
Next question is a follow-up from Michael Ryskin with Bank of America. Please go ahead.
Thanks guys. Just had a quick one that keeps coming up, so I appreciate you squeezing me in. I've had a lot of questions on products coming off IP or potential generic competition or others. You talked a little bit about no expectation for a competitor Simparica Trio, for example. But I was wondering if you have anything expectations, any thoughts about a competing product in the derm portfolio in the U.
S? And also products like Draxen, have had questions on IP rolling off there for a while. So I'm just curious if you're seeing anything there or sort of what your expectations for that are for 2020?
Sure. As we look, I'll just start with derm. We obviously have a significant market for dermatology. We have been expecting competition will enter at some point. Based again in our industry, there's not great data, so I can't tell you exactly when a competitor will launch.
We are obviously planning for a competitor launch in the next 1 to 3 years. Exactly when that will be, will be difficult for us to fully assess. But we do expect a potential small or large molecule entrance. We don't know exactly when that will be, but we have put plans in place to prepare for that overall. It's a key focus for us.
And for Jackson, we still have patent protection through 2021. This is a significant market. So we again here expect we will see competition when that does hit patent when patent exclusivity runs out, that's a significant market. But as we said, what's different about animal health than human health is, even though we'll see obvious competition, we still think in our business that normally has an impact between 20% 40% both in sort of market share and price over a number of years. So we do expect obviously a challenge in 2021 or 2022 on Drafins.
And it appears we have no further questions. I'll return the floor to you, Kristen, for closing remarks.
All right. Well, thanks very much for I appreciate all the great questions today. And if you have any further questions, obviously, let us know. Thanks so much.
And this will conclude today's program. Thank you for your participation. You may now disconnect and have a great day.