Welcome to the Q3 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 is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.
Good morning, everyone, and welcome to the Zoetis Q3 2019 earnings call. I am joined today by Juan Ramona Laix, our Chief Executive Officer Glenn David, our Chief Financial Officer and also by Kristin Peck, our CEO Elect. Before we begin, I'll remind you that slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward looking statements in today's press release and our SEC filings, including, but not limited to, our Annual Report on Form 10 ks and our reports on Form 10 Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.
S. GAAP. A reconciliation of these non GAAP financial measures to the most directly comparable U. S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8 ks filing dated today, November 7, 2019.
We also cite operational results, which exclude the impact of foreign Today,
you Today, you will hear commentary on the market dynamics and quarterly results from me and Glenn. I am also pleased to have Christian Peck, our next CEO joining us to share some remarks on her appointment and the future of Zoetis. As we near the end of the year, let me provide some context around recent market dynamics. The animal health industry in 2019 has been facing a challenging year for swine and cattle. While seeing very good performance in companion animal and poultry.
We have seen a growing appetite in the companion animal market for spending on innovation in pet care. And we once again expect to grow much faster than market in companion animals for 2019. Veterinarians are excited by the new products and lifecycle innovations, giving them more advanced ways to assist pet owners with skin conditions and parasites. The radiology treatment continues to be a critical need and AZOLETIS has been rewarded for the innovation we have developed in this space with continued market penetration and a global expansion of our key dermatology products, Apoquel and Cytopoint. They are on track to achieve more than $700,000,000 in sales for 2019.
In recent years, Zoetis has also been strengthening its position in parasiticides. This year, we added 2 new products to our parasiticides portfolio: Revolution Plus to protect cats against ticks, fleas and internal parasites and Afro Heart 12, a once year injection to prevent heartworm disease in dogs. Additionally, we are planning to launch a SYMPAALICA Trio in European and Canada in the Q1. In the U. S, we expect the FDA to complete the review of Simparica Trio at the end of the Q1.
If approved, we will launch shortly after. Based on these assumptions, we project to generate incremental global sales of Simparica Trio in 2020 at around $150,000,000 In other areas like pain, alternatives to existing treatments for dogs and cats represent a significant opportunity. And in the case of cats, it is largely unmet need today. We are excited by the potential for our research programs with monoclonal antibodies in this area. As I mentioned in the last quarter, we initiated the filing process in the EU and U.
S. For a new feline monoclonal antibody candidate to treat osteoarthritis aiding caps. And we recently also initiated the filing process in the EU and U. S. For a canine monoclonal antibody candidate to treat osteoarthritis pain in dogs.
If approved, we would anticipate these products coming to market in 2021. Meanwhile, African swine fever, trade uncertainties and weather conditions affecting mainly U. S. Cattle are having a significant negative impact on the livestock market. As a result of this negative impact, we expect the overall animal health market to grow rationally between 3% to 4% in 2019 compared to 5.6% in 2018.
And as not in our guidance, we expect to outpace the market with operational growth in revenue of 6% to 7%, and this excluding the positive impact of Abaxis. Turning now to our 3rd quarter results. We continue our strong performance with 9% operational revenue growth in the 3rd quarter, driven by sales of our companion animal and poultry products. Our companion animal portfolio continues leading the way with 23% operational growth based on strong sales of our parasiticides, our key dermatology products and diagnostic portfolio. Diagnostic revenue from the Abaxis acquisition accounted for 2% of the overall growth.
In terms of livestock, we saw an operational decline of 4%. Growth in poultry was 5%, but it was offset by declines in cattle, mainly due to lower feedlot placements in the U. S. And the impact of African swine fever in China. Our 3rd quarter results demonstrate how our diverse portfolio and focus on meaningful innovations are driving our success.
These traits remain the foundation of our consistent long term performance. In the Q3, we grew our adjusted net income by 10% operationally, and we continue to benefit from increasing revenue, improved gross margins and moderate growth in operating expenses. We remain confident in our latest innovation, future pipeline and core business to support future growth and deliver our 2019 guidance, which Glenn will discuss later. As we look ahead, we are making good progress with innovations and investments that will generate our future growth. As I said, we are preparing for the launch of Simparica Trio in European markets and Canada at the beginning of next year with a product currently in production.
Other regulatory reviews remain underway in Australia, Brazil and Japan, with further submissions expected in China and Mexico. In the U. S, we have been expanding our field force to better support our growing companion animal portfolio, including diagnostic products and in preparation for the launch of Simparica 3 next year once approved. We also continue to enhance our vaccine portfolios for livestock. In October, Zoetis received USDA approval for Purvac Proverta HVT and D, the company's first vector vaccine for poultry.
It will help to protect against both Mannich disease and Newcastle disease, highly contagious infection for poultry. The product complements our market leading innovative vaccine delivery system for poultry producers. And it is the first in what is expected to become an important new global vaccine franchise for Zoetis over the next several years, especially in international markets. We are also taking important first steps to address African fine fever, having reached a non exclusive license agreement with the U. S.
Department of Agriculture in late September. This agreement give us access to 3 patents and materials related to African swine fever vaccine strains that will be incorporated into our research. While it could take several years to complete the development and licensing of a vaccine, our work with the USDA and other partners provides a comprehensive approach to addressing these infectious disease. In addition to new products approval and life cycle innovations, Zoetis continues to support future growth through business development activities. Last week, we announced the acquisition of Fenix Lab, a Seattle based reference laboratory that is highly valued by veterinarians for quality assurance and customer care.
This is as ready as first entry to the veterinary reference laboratory space And it is expected to further strengthen our overall diagnostic portfolio, building upon our 2018 purchase of Abaxis, a leading provider of a point of care diagnostic instruments. We view reference labs as another important part of our comprehensive diagnostic offering. And we plan to build our presence in reference lab over time to organic expansions and other small acquisitions in this space. Now I would like to say a few words regarding our leadership transition. As we announced in October, I am retiring at the end of the year.
It has been an amazing opportunity to build a company like Zoetis over the last 7 years. And I feel very positive about Zoetis' future based on our proven strategy, hard earned track record of execution, the diverse and innovative portfolio that underlies our success with customers and the growth investments we are making for the long term. I am confident that our talented colleagues and management team led by our next CEO, Christine Peck, will continue to capitalize on the many growth opportunities ahead of Zoetis and create significant value for our company, customers and shareholders. Christine has been with the company since the beginning of Zoetis and currently serves as Zoetis Executive Vice President and Group President of U. S.
Operations, Business Development and Strategy. Having worked with Christine for many years, I know that she's the right leader for Zoetis next phase of growth and industry leadership. She is a strong advocate for our customer needs, a champion of Xeroit's culture and values, and an inspirational and collaborative leader for our people and industry. Her track record of strong performance through her tenure at Telesthetis as well as her operational experience, innovative strategies and deep customer knowledge position her well to drive her Zoetis continued growth. She will build on our long term strategy, which she helped to develop alongside with the rest of the Zoetis management team and bring her own vision to leading the next stage of Zoeti's journey.
I will remain an advisor to Zoetis during the course of 2020. And Cristina and I are already working closely to ensure a smoother transition and maintain the momentum of our business growth. Before Glenn discuss our Q3 results, I have asked Christine to say a few words. Christine?
Thank you, Juan Ramon. I'm honored to be named the next CEO of Zoetis and I look forward to leading our company into its next phase of industry leadership and value creation. I want to thank Juan Ramon for establishing Zoetis as the world's leading animal health company. I have deep respect for Juan Ramon and his track record of creating value for our customers and for delivering strong returns for our shareholders. His innovative mindset has kept Zoetis at the forefront of the industry.
And I echo Juan Ramon's confidence in our company's solid foundation and prospects for continued growth. Zoetis has a diverse and innovative portfolio, deep expertise in animal health and a winning culture shared by our talented colleagues around the world. We know how to partner with our customers to address their evolving needs across the continuum of care, from prediction and prevention to detection and the treatment of disease. We have a promising pipeline of new products and life cycle innovations and we are focused on making investments in digital technology, data and analytics that will fuel our future growth. As CEO, I will continue to drive forward with our successful long term strategy.
I will look for opportunities to accelerate our progress in the most meaningful areas for our veterinary and producer customers, and I'm committed to building on the strategies, diverse portfolio and financial discipline that have been critical to our success. To that end, I've been working with Juan Ramon, Glenn and the rest of the Zoetis team as well as the Board over the last few weeks to ensure a seamless transition. As I look ahead, I continue to view animal health as a very valuable sector for investors with steady growth prospects as the fundamental macroeconomic drivers of global population growth, urbanization and a growing middle class in emerging markets will drive growth in both companion animal and livestock. The long term history of animal health and Zoetis is a testament to the resiliency of our business. The drivers of pet care and animal agriculture are fundamental to the world economy and core to people's connections with animals for both companionship and nutrition.
I am excited by the new opportunities for raising the standard of care with innovative new medicines, biologics and integrations across the continuum of care. As I prepare for my new role, a key priority for me has been directly connecting with our stakeholders around the world to better understand their perspective on how we can build on our company's success. I look forward to engaging with many of you as part of this process and sharing more on our outlook for the market and plans for 2020 early next year. And now Glenn will cover the financials.
Thank you, Kristen, and good morning. Before discussing our Q3 financial results, I'd first like to congratulate Juan Ramon on his upcoming retirement and welcome Kristin as the next CEO of Zoetis. In his role as CEO, Juan Ramon has led our business through a remarkable transformation from a business unit of Pfizer to an independent and publicly traded industry leader in animal health. He achieved revenue and adjusted net income growth Well, I'm very thankful to have worked with him over the past decade and appreciate that we will continue to benefit from his insight and knowledge as he remains an advisor and director on the board. I'm also very excited to work with Crisin as she transitions to her new role, building upon Zoetis' strong foundation and delivering the next phase of growth.
Kristen and I have worked together at Zoetis for many years, and we share our commitment to customers, colleagues and value creation that has driven our company's success. Now let's review the financial results. We delivered another healthy quarter with operational revenue growth of 9% and adjusted net income growth of 10%. These quarterly results, which build upon our strong performance for the first half of the year, give me confidence in delivering on our full year improved earnings outlook. For the full year, we are narrowing operational revenue growth at the high end of the range, increasing operational growth for adjusted net income and increasing and narrowing adjusted diluted EPS.
Reported revenue growth for the 3rd quarter was 7%, including a negative 2% impact from foreign exchange. Foreign exchange was primarily driven by the strengthening of the dollar against the euro, Argentinian peso and the Australian dollar. Operational revenue growth of 9% for the quarter is driven by 1% price and 8% volume. The volume contribution of 8% includes 3% from key dermatology products, 2% from new partially offset by livestock declines of 4%. Companion animal revenue growth was driven by our parasytenocyte portfolio, including new products Revolucine Plus and Pro Heart 12, C dermatology products, the impact of the Abaxis acquisition and growth in emerging markets such as China.
Excluding the impact of the Abaxis acquisition, companion animal products grew 20% operationally. Equine also had strong growth in the quarter, benefiting from the acquisition of Platinum Performance, a nutrition focused animal health company. Livestock product declines in the quarter were primarily driven by market weakness in U. S. Beef and dairy sectors, the ongoing impact of African swine fever and the revenue recovery of the Brazil truck driver strike that increased revenue in Q3 2018.
These headwinds were partially offset by growth in poultry. Our key dermatology portfolio demonstrated continued strength this quarter with sales of $217,000,000 representing 27 percent operational growth. This was our 1st quarter with revenue greater than $200,000,000 Positive performance in this portfolio was driven by the ongoing expansion of the addressable market, increasing market share and continued uptake of both Apoquel and Cytopoint into recently launched markets. As Juan Oro mentioned, we are clearly on pace to exceed a combined $700,000,000 in revenue this year. New products, especially Revolution Plus and Stronghold Plus as it's known internationally, Cohort12 and swine combination vaccines contributed 2% to overall growth in the quarter.
This growth is net of cannibalization of the original formulations and highlights the success of our investments in life cycle innovation. Sales from legacy Abaxis products were $68,000,000 in the quarter, representing 10% operational growth over the prior year pro form a revenue. Other in line products contributed 1% growth in the quarter, including Simparica, with $55,000,000 in revenue and 28 percent operational growth. This growth was partially offset by declines in U. S.
Cattle and the ongoing impact of African swine fever. Now let's discuss the revenue growth by segment for the quarter. U. S. Revenue grew 11% with companion animal growing 26% and livestock declining 9%.
Excluding the impact of the Abaxis acquisition, U. S. Revenue grew 10%. Strong companion animal performance in the quarter was driven by growth of our parasiticide portfolio, key dermatology products and the impact of the Abaxis acquisition. Excluding the impact of legacy Abaxis products, companion animal growth was 25%.
Our parasiticide portfolio, including in line products such as Simparica and ProHut 6 and new products such as Revolucin Plus and Pro Heart 12, which launched in the quarter, contributed to strong companion animal growth. U. S. Dermatology sales were $154,000,000 for the quarter, growing 28%. Growth this quarter was driven by market expansion, increasing market share, returns on direct to consumer investments and price.
Positive companion animal performance was partially offset by U. S. Livestock declines in the quarter driven by cattle and to a lesser extent swine. Sales of our cattle products were negatively impacted by unfavorable market conditions in the beef and dairy sectors. Lower feedlot placements in the quarter impacted sales of our products as well as pricing pressure driven by competition.
While we continue to see good adoption and growth of the Flostera Gold swine vaccine, declines in other product sales led to lower swine revenue this quarter, primarily due to the timing of promotional activities. These challenges in cattle and swine were partially offset by continued growth in poultry, primarily due to sales of our portfolio of alternatives to antibiotics and medicated feed additives. In addition, we were able to capitalize on competitive challenges, including lack of efficacy and supply constraints. To summarize, the U. S.
Business had a very positive quarter with diversity and innovation driving results, despite challenging market conditions in the cattle Our International segment also contributed to growth this quarter with operational revenue growth of 5%. Companion animal operational revenue growth was 16%, while livestock declined 1% operationally. Excluding the impact of the Abaxis acquisition, international revenue grew 4% operationally. Companion animal product growth was driven by key dermatology products, the addition of legacy Abaxis products and growth in emerging markets such as China. Excluding the impact of the Abaxis acquisition, companion animal operational growth was 13%.
International livestock declined modestly, primarily due to the impact of African swine fever as well as an unfavorable comparison to the prior year, which included the revenue recovery from the Brazil truck driver strike. Growth in cattle and poultry partially offset the declines in swine, driven by favorable market conditions in key markets including Mexico, the U. K. And Canada, while poultry benefited from increased sales in China, Australia and Brazil.
Now I would like
to review in more detail a few markets in the quarter. Beginning with China, revenue declined 9% operationally, driven by the ongoing impact of African swine fever, which was partially offset by continued double digit growth in companion animal. Our livestock portfolio declined 40% operationally in China, driven by swine declines that were partially offset by growth in poultry and cattle. As I indicated last quarter, we expect the full year impact of African swine fever to our revenue to be approximately $50,000,000 While the operating cash continues to spread to other markets in Southeast Asia, our full year estimate remains consistent. In the medium to long term, we continue to anticipate that other regions will increase exports of pork and other proteins.
However, we have not seen increases in production to any significant extent. Our companion animal products continue to grow significantly in China, increasing 43% operationally. Sales from parasiticide, vaccines and Apoquel were the primary drivers of growth aided by fuel force expansion and effectiveness. Moving on to Brazil. Sales grew 1% operationally driven by companion animal growth of 17%, partially offset by a livestock decline of 5%.
Companion animal revenue growth in Brazil was driven by our key dermatology portfolio, including Cytopoint, which launched in the 2nd quarter as well as growth in Syntaric. Livestock declines in Brazil this quarter were driven by an unfavorable comparison to the prior year when sales were recovered due to the resolution of a national truck driver strike that occurred in Q2 of the prior year. In Mexico, sales grew 22% operationally, driven by livestock growth of 15% and companion animal growth of 46%. Livestock benefited from sales of our premium products for cattle, while strong companion animal performance was driven by growth in legacy Abaxis products, parasiticides and vaccines. Other emerging and developed markets also contributed to international growth this quarter, particularly in companion animal, driven by parasiticides and key dermatology products.
Overall, our international segment continued to perform well, demonstrating the importance of our global diversity and helping to offset the impact of African swine fever. Now moving on to the rest of the P and L. Adjusted gross margin of 70.1% increased approximately 140 basis points in the quarter on a reported basis compared to the prior year. The increase is driven by foreign exchange, product mix and price, partially offset by tariffs on certain products and the inclusion of the lower margin legacy Abaxis portfolio. Total adjusted operating expenses, including the impact of the Abaxis acquisition, grew 6% operationally.
The increase is primarily related to compensation related expenses and investments to support future growth of the business. The adjusted effective tax rate for the quarter was 20.5%. The increase from the comparable 2018 period is primarily related to the impact of the global intangible low taxed income or GILTI tax, which is effective for Zoetis in 2019. Adjusted net income for the quarter grew 10% operationally and adjusted diluted EPS grew 11% operationally, again outpacing revenue growth. The combination of revenue growth, improving gross margins and disciplined operating expense growth enabled us to deliver strong bottom line results while still investing strategically for long term sustainable growth.
Now moving on to guidance for the full year. As a result
of our strong performance in
the 1st 9 months of the year, we are narrowing operational revenue growth at the high end of the range, raising operational growth for adjusted net income and raising and narrowing the range for adjusted diluted EPS. Please note that guidance reflects foreign exchange rates as of late October. I'll now walk you through each of the individual line items beginning with revenue. We are now expecting to deliver revenue between $6,200,000,000 $6,250,000,000 as compared to our previous range of $6,175,000,000 to $6,275,000,000 The dollar decrease in revenue guidance at the high end of the range is related to unfavorable foreign exchange. Operational revenue growth is now expected to be between 9% 10% as compared to our previous estimate of 8.5% to 10%, reflecting the continued momentum of our companion animal portfolio.
Our organic operational revenue growth, which excludes the impact of Abaxis, is now expected to be between 6% 7%. We are now projecting adjusted cost of sales as a percentage of revenue to be approximately 30% compared to our previous range of 30% to 31%. Adjusted SG and A for the year is expected to be between 1,525,000,000 $1,550,000,000 compared to our previous range of $1,505,000,000 to $1,545,000,000 The increase in narrowing at the high end of the range reflects our focus on critical investments to support revenue growth, including promotional activity on key companion animal products. Adjusted R and D expense for 2019 is now expected to be between $445,000,000 $455,000,000 for the year compared to our previous estimate of $450,000,000 to $465,000,000 The decrease is related to the timing of project spend. Our full year adjusted interest and other income deductions is expected to be approximately $190,000,000 and our full year adjusted tax rate is expected to be approximately 20%, which are both consistent with previous estimates.
Adjusted net income is now expected to be in the range of 1.72 dollars to $1,745,000,000 representing an increase of $10,000,000 at the high end of the range. The updated adjusted net income range represents operational growth of 11% to 14% compared to previous range of 9% to 12%. The improved outlook for adjusted net income is primarily driven by gross margin favorability. We're also increasing our adjusted diluted EPS to a range of $3.57 to $3.62 compared to our previous guidance of $3.53 to $3.60 Our range for reported diluted EPS is increasing and narrowing now expected to be between $2.99 to $3.08 based upon operational increases. Our previously estimated range was $2.93 to $3.04 We expect approximately $450,000,000 to $475,000,000 in capital expenditures this year with increased investment in information technology and manufacturing to support our Abaxis acquisition, improve cost efficiencies and increase capacity.
We anticipate continuing at an elevated level for the next few years as we invest in manufacturing and infrastructure to support future growth and product launches. We also repurchased approximately $450,000,000 of Zoetis shares in the 1st 9 months of the year. We have $1,900,000,000 remaining under the multiyear share repurchase plan that was approved last year and remain committed to our capital allocation priorities of internal investment, M and A and returning excess cash to shareholders. Our guidance for reported and adjusted earnings per share reflects the shares repurchased through the end of Q3. While we will not provide guidance for 2020 until February, we view next year as a continuation of strategic investment to support recent and future product launches, our recent acquisitions, including Phoenix Lab and Platinum Performance and other strategic priorities.
Now to summarize before we move to Q and A, we have consistently delivered strong top and bottom line growth in the 1st 9 months of the year despite market challenges in cattle and swine. We are narrowing our outlook for operational revenue growth at the high end of the range and we are increasing and narrowing our outlook for adjusted net income and adjusted diluted EPS reflecting the strong performance year to date. And our investments in R and D, Diagnostics Integration, Manufacturing Capabilities and Salesforce expansion will provide a solid platform for continued growth in 2020 beyond. 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 Kevin Ellich with Craig Hallum. Please go ahead.
Good morning. Juan Ramon, It's been great working with you and I hope you enjoy retirement and get to play a lot of golf.
Thank you, Kevin.
Chris, congratulations. We all know you're going to do a terrific job succeeding Juan Ramon. So yes, let's the questions I have. First, I think you guys talked about Simparica Trio saying that your assumption is if it's approved in the U. S.
By the end of Q1, revenue would be about $150,000,000 in 2020. Did I get that right?
Yes. The incremental sales that we expect for Trio over our existing portfolio is $150,000,000
And what are the underlying assumptions there, Glenn, in terms of pricing? How much will come from the U. S. Versus international? And how much cannibalization?
So in terms of the breakout between U. S. And international, like we said all along, we expect the majority of the sales for this product to be in the U. S. I don't really want to get into details on price from a competitive perspective at this point, but like we said, we do expect it to be priced at a significant premium to Simparica.
And the cannibalization impact, obviously, there'll be some cannibalization to Simparica, but we also expect to take significant share from competition.
We'll take our next question from Louise Chen with Cantor Fitzgerald.
So Juan Ramon, we will miss you and Kristen, congratulations on the new role. My first question is for you Kristen. As the new CEO of Zoetis, what will you do differently from Juan Ramon? And then also just on 2020, I know you're not giving guidance until February, but how should we think about the pushes and pulls as we look into next year? Thank you.
Sure. Thanks so much, Louise. I'm going to be focused on really continuing the strong path of value creation. If you look at the strategy that we've had over because we IPO ed actually, it's delivered significant results and both for our customers and for our shareholders. It has been a dynamic strategy that has always been predicated on continuous innovation and disruption, which I think is really what have helped us stand out.
It's also been characterized by a great diversity of our portfolio. And my goal is to maintain that strong momentum, to stay ahead of competitors. I think as I look into 2021 and beyond, I'm really going to be focused on innovation, making sure we continue to bring to market products that really solve both our customers and animals challenges. I will continue the relentless focus on our customer, making sure that we're finding ways to make their jobs easier to do and to make them more productive. And I'll be looking to better leverage digital and data, both to make us more efficiently internally as well as to drive better productivity and greater growth in some of our data and digital revenue products, both in diagnostics and in precision livestock farming.
So that will be my focus as we look into 2020 and some of the sources of where I think you'll see our continued growth.
And in terms of the pushes and pulls for 2020, starting with the revenue line, We continue to see good momentum in our companion animal business and particularly with the expected launch dose in Paracutrino subject to approval, we expect to see very strong performance there as well as the continued growth in some of the new products that we launched this year such as Pro Heart 12 and Revolution Plus. So again, also when you take into account the impact of African swine fever that we had this year, we expect that to stabilize this year and not to be a negative detractor to growth in 2020. So that should benefit us as well. When we look at the expenses, obviously, there'll be some investments to support our new product launches. We want to make sure that we get those products off to a strong start and also some investments to support the recent acquisitions that we have in place.
So overall, we'd expect revenue to grow faster than the market, again in 2020, and we'd expect that we'll be able to grow income faster than revenue.
Thank you. We'll take our next question from Erin Wright with Credit Suisse. Please go ahead.
Great. Thanks. And Kristen congrats Juan Ramon as well. It's obviously been very, very nice working with you. I had a quick question on Simparica Trio, $150,000,000 in 2020.
It's a little bit higher, I guess, than what we were contemplating on a net basis. I just want to confirm some of the assumptions that you're making. Does it assume that you launch ahead of VMX? And does it assume that you'll be the only player in the U. S?
And does it also assume a puppy indication or other label caveats from a safety I guess, how quickly can you scale up the U. S. Lab footprint? And I guess how quickly can you scale up the U. S.
Lab footprint? And what are some of your plans internationally from a reference lab perspective as well? Thanks.
So, Christine will answer all these questions. So please, Christine.
Sure. So starting with Trio, we do not expect to be launching ahead of VMX and Western Vet, but we do expect to be launching ahead of the very important Q2, Q3 parasiticide season. So we will not be prepared, but I do think if you look at the $150,000,000 to your point, we still expect to deliver a very strong year there. We do expect to get a puppy claim. That is one of the assumptions that is in there.
It's obviously subject to FDA approval, but that is our going in assumption as we look at that. So as I move towards reference lab, we continue to believe that diagnostic is an important part of our go forward portfolio. It is critical to the vet and is that part of their business that will stay there. We think it enhances Zoetis' current value proposition and is a great complement to our existing portfolio. It's a large and very fast growing market.
As the market has been growing at 10% plus, we strongly believe that it can accommodate a 3rd player. We've also known that customers have been looking for a 3rd party alternative. And if you look in different MFA, shares of 3rd parties have actually been significant as our acquisition of Phoenix demonstrates. They had over 50% share in the MFA they operated in. Our plan in this space is to invest both organically and inorganically over the next few years, and we remain committed to the space.
Next question, please.
We'll take our next question from Christopher Schott with JPMorgan. Please go ahead.
Great. Thanks very much for the question. I guess my first one just was on Apoquel and Cytopoint ex U. S. You just provide any additional color in terms of where penetration rates stand in some of the bigger markets in terms of Europe, Brazil, etcetera, and where you think those penetration rates can go over the next several years?
And my second question, sorry to keep coming back to this $150 number, but I'm still not quite clear. Can you just help me understand again, how much of that 150 is incremental revenue on top of what your parasiticide business is already doing as compared to erosion from, I guess, legacy Simparica and some of your heart products, etcetera. I'm just trying to understand the magnitude of overall growth I should be thinking about for parasiticide next year? Thank you.
Thank you. Glenn will provide some data related to the penetration rates and also details of the $150,000,000 how much is cannibalization, how much would be additional revenues?
So when you look at Apoquel and cytoplasm, particularly in the U. S, we see that we have plus 60% share in that market. The data internationally is not as clear in terms of we don't get the same level of data, but we know we're not at that penetration rate. Also, we've launched Cytopoint later international than we do in the U. S.
So we do think we have continued uptake there. So we do see significant opportunities international to continue to gain share as we move up to the similar levels that we have in the U. S. We also see continued opportunities in the U. S.
As we continue to expand that market and raise disease awareness of dermatology and atopic dermatitis. So we see continued opportunity in the U. S. As well. In terms of the $150,000,000 in revenues for Simparica Trio, I want to be clear that is incremental sales over what we see for Simparica alone and that does include the cannibalization effect.
So we would expect greater sales of Trio than $150,000,000 as a standalone product.
Next question, please.
We'll go next to Michael Ryskin with Bank of America. Please go ahead.
Thanks. And I want to mirror the earlier comments. Congrats on Ramon. It's been great working with you and Kristen look forward to working with you going forward. Two quick questions from me.
1, on some of the moving pieces in the quarter and sort of looking forward, I would say one
of the bigger surprises of
this year has been in the entire market, not just Zoetis specifically, but some of the challenges in U. S. Live particularly given the negative tone of ASF internationally. There's an expectation that you would see at least some stabilization in U. S.
Livestock in the market in cattle and swine, and it's been a little bit slow, probably slower than expected this year if you look back 9 months earlier. How do you see some of these dynamics playing out? We talked about ASF internationally, but if you think about the cattle herd in the U. S, some of the feedlot pressures that we've seen this year in terms of placements, if you could talk thematically sort of over the next 6, 12 months? And then a quick follow-up on the seasonality question.
You talked about the Simparica Trio approval likely end of 1Q, early 2Q launch. Could you talk about sort of the timing that you think about the vet purchasing? A lot of the ordering by vets happens relatively early in the year. So how much wiggle room do you have built in and how quickly can you ramp up manufacturing to make sure that you don't miss that flea and tick season if there's a month or 2 movement either way there?
Let me answer the question on Simparica Trio and then Cristina will cover the trends and also the challenge that we have seen in the U. S. Livestock. And we'll also talk about the African national in the field. So we expect approval in late Q1 from FDA.
And then shortly after, we will go and sell the product in the market. We are taking already the appropriate steps to ensure ample supply of the product as soon as we obtain approval in the
U. S.
So we don't think that the supply will be a restriction in terms of capturing the opportunities of the high season that it's mainly in Q2 followed with Q3. We are confident that with all the effort that we are making now, if the product is approved by the VA, we'll be able really to generate a significant opportunity for SimbriCat Vira in 2020. So moving into the U. S. Livestock, Kristine?
Sure. As you saw in our numbers, both dairy and beef in the U. S. Continue to be weak. As we've said in previous conversations in previous quarters, we expect this to continue for the rest of the year and into next.
From a dairy perspective, we've seen depressed milk prices versus historical trends, which has limited producer profitability some. In the last few months, there has been a small improvement in pricing, but it's not yet sustained enough, we believe, for producers to believe recovery is imminent and to start investing significantly. Feed side, we're at the end of what's been a very long expansion period. So we are expecting a little bit of contraction or flattening out over the medium term. As you look at beef, there's also been a lack of innovation that has driven significant pricing and competitive pressures.
We had a wet spring, which had good pasture this year, which has kept cattle out longer. And as you've seen, there's been a significant increase in some of those feeder prices and live cattle prices, which has encouraged them to wait till their animals were heavier and older to put them in the feedlot. So as we look at U. S. Cattle, I think we'll continue to see challenges of that as we look into next year.
And as we look at ASF, as we've spoken at previously, we believe with China specifically, we see a $50,000,000 impact across Zoetis, primarily based out of China. As we look into next year, we're hoping for that to stabilize and we're hoping to see some recovery moderate, but obviously that remains to be seen based on how that goes. But we do see offsets for the China swine. We are expecting imports from EU, Brazil and the U. S, both in swine as well as across other proteins to help compensate that.
We've seen significant price increases in pork globally. We see Brazil and EU probably best positioned to take some of this. But I think overall, we've seen some of the announcements in the U. S, the U. S.
Will also go after trying to get greater share there. So we remain quite committed. But I think the we believe that the impact of ASF should flatten out as we look into next year. So hopefully that answers that.
Thanks for your question, please.
We'll go next to John Kreger with William Blair. Please go ahead.
Hi, good morning. This is John Kaufman on for Kreger. Juan Ramon, we wish you well and Kristen congrats on the new role. One of your competitors has talked a lot recently about the importance of alternative channels. Can you guys talk a little bit about that?
How important are the online and the mass market retail channels for you today? How has your strategy evolved here over the past year or so? And as you think about the future outlook for the company, how much of the growth do you think will come from these alternative channels? Thank you.
Well, we have seen, John, changes on how pet owners are getting their products from different channels. We have seen that mainly in the U. S, but also in some other markets there are changes that really having an impact into the veterinary space. But Christine will provide much more color on how things are changing in the U. S, how this affecting the market, affecting manufacturers, affecting the veterinarian.
So Christine, do you want to provide these comments, please?
Sure. I would start with, as you look at our portfolio as a contrast with others, the majority of what we sell requires a prescription. So our goal is to work with vets to make our product available to pet owners in a way that works best for them. And what we've seen is in the area such as parasiticides and chronic medications, many pet owners have looked more to buy their products from e commerce and retail. And as such, we've evolved our own strategy to work more directly with e commerce and retail.
We implemented, as we discussed on previous calls, the minimum advertised price or MAP pricing, which is an agreement with all e commerce and retailers to ensure that they cannot advertise our product beyond a certain price. This has allowed us to legitimately sell our product, eliminate some of the gray market and provide veterinarians and pet owners the convenience to fill their prescriptions where and how they want. This I think is an evolving thing. Just to give you context, still 50% to 60% of what we sell will have to remain no matter what in the clinic. It's definitely expanding quickly, but still on a relative basis, it's still a small part of our business today.
It's something we're monitoring closely and we're making sure that we continue to develop and enhance our capabilities to best serve this new channel as we move forward. Next question, please.
We'll go next to Jon Block with Stifel. Please go ahead.
Thanks, guys. Good morning. And maybe just a handful of small questions. Most are actually just clarifications. So first, clarification for Companion Animal.
Did you guys say both canine and feline mAbs both targeting U. S. Approval in 2021? A clarification for ASF, I was a little mixed up there. Is the thought that the drag for 2020 will be less than the $50,000,000 incremental hit in 2019, but you still think there could be additional incremental headwinds for 2020?
And then lastly, but not going to 2020 guidance on you, but just when we think about that COGS and sort of hitting that 70% bogey for 2019, which is certainly impressive, I would think you're still going to have a favorable mix shift in 2020 as companion grows faster than livestock based on all the commentary, but do some of the investments in manufacturing offset that? Thanks, guys.
Thank you, John. And well, let me confirm that we have filed both monoclonal antibodies for paying for cats and dogs in EU and the U. S. And we expect launch in 2021 of these two products in the U. S.
Moving into the African swine fever, well, the assumption that we are making and the comments that we provided today is with assuming that there will not be further spreading of African swine fever outside of China. We have seen cases in Southeast Asia, Korea, the Philippines, to a lesser extent also in Eastern European markets. But what we expect that customers now are improving biosecurity and they are protecting better against the African swine fever. We are not expecting China to continue growing in terms of cases, maybe an opportunity to slight increase in production in China. And definitely we see the opportunity in other markets to compensate the gap that we will have in terms of supply of meat into the Chinese population with more importation from Brazil, European Union Markets, Spain, Germany and some other markets, Canada and the U.
S. And this is something that in our opinion will help also to generate growth in livestock in 2020. So moving into the third question in terms of gross profit. Glenn, you want to cover that?
Yes. So John, your thoughts on gross margin are accurate. When you look into 2020, there should definitely be a favorable mix as we would still expect companion animal to grow faster than livestock in 2020. Just one thing to note on that, Trio being the 1st year of product launch will not be as favorable to gross margin as the rest of the companion animal portfolio would typically be. Over time, we do expect that product to have very favorable margin.
But with the 1st year of launch, there's always learnings and efficiencies that will be delivered over time. The other thing to take into account is that FX had a very positive impact in 2019 to our overall gross margin. We would not expect it to be positive in 2019, probably be somewhat of a detractor in 2020.
Thank you. Next question, please.
We'll go next to David Westenberg with Guggenheim Securities. Please go ahead.
Hi. Thanks for taking the question. I echo the congratulations. So just in terms of market sizing, can you help us size the market for the cat opportunity given that there is no existing market? Just any sort of frameworks that we can think about in terms of maybe population, age, etcetera?
And then secondly, a competitor called out the ASA, African swine fever vaccine market as a multibillion dollar market. Can you maybe give us a framework on the size of that as well? Do you agree with that assessment? What are the puts and takes there? Thank you.
Okay. So let me provide some comments on the market size for CARs in monoclonal antibodies. So first, there is no any specific product today in the market developed specifically for cats. We know that the number of cats, it's lower than the number of dogs and even more. The number of medicalized cats is even lower than the number of medicalized dogs in the U.
S. And also worldwide. If I compare the market of dogs in terms of managing pain, it's about $400,000,000 to 500,000,000 dollars worldwide. So with the comments I made in terms of medicalization rates and the number of cats, we need that we should expect that the market potential for cats in pain is lower than this 4 $100,000,000 to $500,000,000 But the advantage is that I will be entering into a space that there is no any clear product addressing pain in dogs and we think that we can generate a significant growth opportunities in this area. Then how big is the African swine fever market?
I don't know if the question is related of how much has been the impact on the African swine fever or Like the vaccine. The vaccine. Well, I think it's something that it's too recent because definitely we see a significant opportunity in China developing this vaccine, but also not only in China that we have already the disease, but also the need to protect African swine fever in other markets. We are convinced that this will can be one of the top vaccine products worldwide more than FMD or even more than PCV2. So the opportunity for developing a vaccine in this area is significant.
Next question please.
We'll go next to David Risinger with Morgan Stanley. Please go ahead.
Thanks very much. And let me please add my congrats to you both Juan Ramon and Kristen. So my two questions are first, with respect to U. S. Tick, could you help us understand what percentage of the U.
S. Dog market needs tick coverage? Obviously, there are no ticks in the South. I just don't know what percentage of dogs reside in tick infested areas in the country. And then second, could you comment on livestock pipeline launch opportunities in the next year or so?
Thank you.
Thank you, Navin. Christine?
Sure. If you look at U. S. Tick coverage, there is significant tick coverage across the United States. There are different ticks.
So in the South, you might see more of the Gulf Coast tick, which is actually a very difficult tick to treat versus the Zodie tick or the Deer tick in the North. So we do believe that most pests in the United States need a comprehensive tick protection. There may be some geography where there's
not a lot, but I
think there may vary the ticks, but lean tick protection is critical we believe across the U. S. As we think about our livestock population opportunities, as you saw in the press release, we are quite focused on driving innovation across livestock. We announced a partnership with Colorado State to look at antibiotic alternatives in the livestock space. We're also really focused on immunotherapies in livestock as alternatives to antibiotics and are excited about some projects there as well.
We're also looking at precision livestock farming to make producers more productive and to better predict animals that are going to get sick. We're also excited in the area of genetics, where we can breed healthier animals that are also more productive. And as we've talked about in previous calls, looking through diagnostics to bring more shoot size, farm side diagnostics across that.
Thank you. Next question please.
We'll go next to Navin Jacobs with UBS. Please go ahead.
Hi, this is Prakar on for Navin. I had two questions. First on Simparica Trio, one thing we are hoping to get more clarity on is around duration of therapy. So take free products are more seasonal, which is not typically the case with heartworm products. So how are you thinking about the duration of therapy for Simparica Trio?
Do you expect this to be predominantly used in the tick season or could duration of therapy be more? And secondly on Abaxis, you've talked about expansion into OES markets as a key opportunity. So could you provide an update on the expansion plan and have you identified target markets or regions that might be ideal? And longer term, could Abaxis reach similar size in international markets as the U. S.
Market? Thank you.
So thank you very much for the 2 questions. So let me answer the duration of therapy. And answering the way that one thing is that what duration of therapy that we believe it should be in many of the markets for both. And what is the actual duration of therapy that is probably 3 or less more. So it's a significant opportunity in terms of compliance.
And we may see some high season for ticks and fleas depending on the warmer weather, but the need to protect animals goes across the year. And definitely in the case of a hardworm, it's a 12 month need of protecting against this type of disease. And I'd like Christine to talk about Abaxis space expansion plans, both U. S. And international.
Sure. When we announced the Abaxis deal, we talked a lot about the fact that we think we can continue to operate the Abaxis business in the U. S. Much better and drive more efficiencies and drive growth, but acknowledge that the competition in the U. S.
Is a little deeper. As we look into international, we strongly believe in international, there are significant growth opportunities. It's more of a blue ocean with a much more fragmented base. The use of diagnostics also varies dramatically by market. We're very focused on building our own direct demand generation field force, which has really been lacking across most companies that operate in international.
We've looked at 2019, as we've talking about for Abaxis, as a platform year to really establish ourselves there. And we plan to move to direct distribution from some of our existing distributors across most markets as we look into 2020. So we do think there's a significant opportunity in Abaxis to reach a similar, if not higher share than we have in the U. S. Just given it is a less mature market with much more fragmentation, but it will require a market by market approach.
Thank you. Next question, please.
We'll go next to Nathan Rich with Goldman Sachs. Please go ahead.
Thanks for the questions. And let me also offer my congratulations. On the triple combo, have you guys gotten feedback from the FDA just on where they are in their review process and kind of what is driving your expectations for maybe a little bit later of an approval than you originally expected? And then can you also talk about the timing for submission and when you would expect approval for the triple combo in China and some of the other geographies that you mentioned like Mexico?
Let me really make some comments about the process of approval in the U. S. But there is something which is part of the normal process of questions and answers. We get some additional request for information from ATA, not related to safety or efficacy. And we already answered these questions.
And now we are waiting for the feedback. And we expect the final decision on Simparica Trio by late Q1 of next year. But that is something that is part of regulatory discussions with many of the regulatory authorities across the world. We said before that we were expecting approval and launch in the Q1. We have already obtained approval in Europe and Canada, and we are launching the agreement of the Q1 in these markets.
And we'll be ready for launching shortly after approval in the U. S. And as I said, we are already taking the steps to have ample supply to meet the market needs in 2020, always faced with the assumption that we provided today of this $150,000,000 additional revenues in for Simparica field. And then you also asked about approval time in China. This is unfortunately something that at this point is difficult to answer.
We are preparing the filing in China. And then after the filing, probably we'll get a little bit more clarity on the timing expected to launch in this market. So first, we need to launch Simparica as a single agent in China. And then also PsychoPoint that is another important product that we plan also to launch in China. And then later we'll be launching the Cypriotrios.
So even if it will take maybe some years, we have products coming into the market in China that will generate very positive growth momentum in this market. Next question please.
Next question is from Kathy Miner with Cowen and Company. Please go ahead.
Thank you. First again, Juan Ramon and Kristen, our congratulations to you both. Just a couple of questions. First on the canine pain mab that you filed, can you tell us if that the compound that you acquired from Nexa a couple of years ago? 2nd, I noticed that Aqua or the fish sales were down 9% this quarter and that's somewhat unusual, that's been a growing market.
Is that something temporary or is there a change in the outlook? And last question, when we look at African swine fever, I think took everyone by surprise. Are there any other diseases that you're monitoring that could impact your business over the next 3 to 5 years? Thank you.
Thank you for the question. So let me start with answering the question about the monoclonal antibody for dogs. So we have multiple programs in our R and D activity. The product that we are now planning to launch is an internal program for dogs. The one that we are planning to launch for cats is coming from NextBet.
You also asked about the decline in the quarter related to fish. Well, this we have been growing very fast in previous years in fish. This year, we had some challenges related to the PD vaccine in Norway. We expect that it's a temporary adjustment and we expect fish to continue growing faster than the overall animal health market. The long term opportunities in fish is related to adding new vaccines to protect other species different than salmon.
Today we have most of our revenues are concentrated in salmon in Norway and Chile, but we expect to continue developing new vaccines to protect animals different than salmon and to reduce the use of antibiotics, which is today the only treatment or the only protection against infections for species like pengasos or tilapia or other fish. Definitely, we continue investing in fish and we are confident that fish will be a growing opportunity in the future. Next question please.
We'll go next to Greg Gilbert with SunTrust. Please go ahead.
Thank you. Good morning. A couple of longer term ones for Chris. Clearly Zoetis is a leader overall in the industry, but is there an area or areas you'd like to see Zoetis be more of a leader than it is today? And secondly, on the companion side, Kristen, do you think pet owners are anywhere close to maxing out what they can afford or what they choose to afford in caring for their pets?
I realize leafletic hardware is not in this category, but thinking of 3 to 5 years plus down the line, expensive biotech products, etcetera, maybe you could just comment on that while we turn? Thank you.
So let me answer the first question and then Christine will cover the second. So where we see that we can improve our market share and becoming a stronger leader or becoming leader. And in this call, we announced that we obtained approval of new vaccine for POCSY, which is related to vector technology. It's an area that we believe that will be a growing opportunity for Zoetis. We are starting with one vaccine, but the objective is to develop complete set of vector vaccines to cover multiple diseases in poultry.
And this will help us also to maximize opportunities with our leadership in Novo Jet Set vaccination, which is the machine that is used in hatcheries to protect chicken before hatchery. So we are injecting eggs. And we see an area in where we have less share than the overall share that Zoetis has. The second area in where we think that we have been improving significantly since the launch of Simparica followed by the launch of Revolution Plus ProHar 12, it's parasiticides. And we expect also with the launch of Cyparin Patrillo to become a much stronger leader in parasiticides than today.
Christine?
Sure. Spending question. We've seen increases over the last few years in the spend per pet. I think a lot of that has to do with the demographic shift in developed markets, where people are having fewer children spending more time with their pets. Millennials in particular are much more engaged with their pets.
As we've spoken about, the increase in pet spending starts when they move from the backyard to your house and then ultimately to your bed. So we don't see any end in this market. It's been a very resilient business, even in times of economic challenges. People have continued to spend on their pets. So we don't see right now any indicators that that spending per pet would be going down.
So I think it remains a strong market as we look to the future. And as you look at the urbanization and the emerging middle class and emerging markets, we see significant growth there as you add more markets that keep more pets and medicalize more pets.
Next question please.
And we'll go next to Kevin Ellich with Craig Hallum. Please go ahead.
Thanks. So one quick one. Thinking about African swine fever in a different way, down the road when it's time to repopulate the herd, just wondering how much benefit that could bring to Zoetis, especially given your presence in genomics and genetics?
Sure. If you look at the repopulation, I mean, eventually China and some of these other geographies will repopulate. We believe when they do, then we'll move more to industrialized production and more away from the small backyard farms. We think that does play to the strength of innovative companies like Zoetis. So we do see the future of African swine fever as it goes down meeting more technologically based production, which we think will be an increase for us.
And certainly, if we're able to create a vaccine for African swine fever, there'll be even more increased growth.
Next question, please.
And there appears to be no further questions. I'll return the floor to Juan Ramon for closing remarks.
Thank you very much. And since this will be my last earnings call, I want to thank you all of you for the support you have given to me and Zoetis over the last 7 years. It has been an amazing journey and I'm very proud of the value that we have created. I know that you will enjoy the same ongoing commitment to our valuable vision from Christine, Glenn and the rest of our leadership team as they take Zuadis into the next phase of growth. In closing, I remain confident in a brighter future of Zoetis.
This company and its people have the capabilities, experience and customer focus to continue delivering world class results for our customers and our shareholders. Thank you very much.
And this will conclude today's program. Thanks for your participation. You may now disconnect.