Zoetis - Earnings Call - Q2 2025

Executive Summary

• Zoetis delivered a clean beat and raised FY25 guidance: Q2 revenue $2.46B (+4% YoY) and adjusted diluted EPS $1.76 (+13% YoY); EPS and revenue exceeded consensus and management lifted FY25 ranges for revenue and adjusted EPS, citing execution, price/volume balance and cost discipline.
• EPS beat of ~9% vs S&P Global consensus ($1.76 vs $1.61*) and revenue beat of ~2% ($2.46B vs $2.41B*); organic operational revenue growth was 8%, with price and volume each contributing ~4%.
• Guidance raised: FY25 revenue to $9.450–$9.600B (from $9.425–$9.575B) and adjusted EPS to $6.30–$6.40 (from $6.20–$6.30); adjusted cost of sales % trimmed and interest/other lowered; tax unchanged.
• Key drivers: Simparica Trio and dermatology remained strong; OA pain mAbs saw U.S. headwinds (Librela down 16% in U.S.), with management leaning into education and Phase 4 data; alternative channels reached ~22% of U.S. companion animal, supporting compliance and stickiness.

What Went Well and What Went Wrong

• What Went Well

  • Broad-based growth: Organic operational revenue +8% and adjusted net income +10% in Q2; management emphasized balanced price/volume and durable growth across species/geographies.
  • Simparica/Trio momentum: U.S. Simparica franchise +18% on $329M; Trio growth despite competition; puppy triple-combo adoption ~60% and alternative channels supporting compliance (mid-20% growth).
  • Margin execution and cost discipline: Adjusted cost of sales improved to 26.3% of revenue; CFO highlighted improving manufacturing cost trajectory and favorable mix; guidance lowered adjusted interest/other.
  • Quote: “Zoetis delivered a strong broad-based performance… 8% organic operational revenue growth.” — CEO Kristin Peck.

• What Went Wrong

  • OA pain mAbs in U.S.: Librela declined 16% to $45M; combined OA mAbs in U.S. down 12% to $62M; vet/pet-owner education and Phase 4 studies underway to address adoption barriers.
  • U.S. Livestock headwinds: Reported -21% YoY due to MFA divestiture; organic -2% driven by timing of ceftiofur supply and Draxxin competition.
  • Tariff environment: Slightly higher impact than May outlook but absorbable; uncertainty remains around future policy changes and exclusions.
  • Analyst concerns: Near-term cadence risks in H2 from expected derm competitor launch and OA pain adoption timing; management kept double-digit growth outlook for key franchises.

Transcript

Speaker 2

Welcome to the second quarter 2025 financial results conference call and webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion via dial-in or on the Investor Relations section of zoetis.com. At this time, participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press Star and 1 on your telephone keypad.

If at any point your question has been answered, you can remove yourself from the queue by pressing Star and 2. In the interest of time, we ask that you limit yourself to one question and then queue up again if you have any follow-ups. Your line will be muted when you complete your question and when posing your question, please pick up your handset to allow for optimal sound quality. It is now my pleasure to turn the call over to your host, Steve Frank, Vice President of Investor Relations for Zoetis.

Thank you, operator. Good morning, everyone, and welcome to the Zoetis second quarter 2025 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer, and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including but not limited to our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP.

A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the Company 8-K filing dated today, Tuesday, August 5, 2025. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Speaker 0

Thank you, Steve, and good morning, everyone. Welcome to our second quarter 2025 earnings call. Thanks to the dedication of our colleagues around the world, we delivered strong, broad-based 8% organic operational revenue growth, a reflection of the strength of our innovation engine and the excellence of our customer-focused execution. We also grew adjusted net income 10% on an organic operational basis, underscoring our focus on operational efficiency. Our international segment grew organic operational revenue 9%, demonstrating our ability to capitalize on key trends that are expanding regional markets. The U.S. grew 7% excluding the impact of the MFA divestiture campaign, and animal grew 8% operationally while livestock delivered 6%. Organic operational growth was driven by sustained demand for our trusted, market-leading solutions.

This quarter's performance highlights the strength of our diversified portfolio with growth across markets, species, franchises, and channels, and balanced contributions from price and volume, a testament to our strategy. With organic operational revenue up 9% in the first half, we are delivering in line with our plan and are well positioned to carry that progress into the second half. Our consistent performance across economic and competitive cycles reinforces the strength of our business and animal health as one of the most compelling long-term growth sectors. Key franchises collectively delivered another quarter of double-digit performance, underscoring not only their continued momentum, but also the power of our innovation and the disciplined execution that drives value across the business. As you look closer at our companion animal growth drivers, it's clear that innovation is not only our core competency, it's the most powerful way we live our purpose.

What's equally clear, our key franchises have significant runway for continued durable growth. Our Simparica franchise, for example, grew 17% operationally. Even after nearly two years of competition, demand continues to rise for comprehensive triple combination protection. The fastest growing segment in the parasiticides market, our Simparica Trio, is setting the standard of care, delivering 20% operational revenue growth with new entrants. The overall category continues to expand, fueled in part by increased promotional activity that is raising awareness of the benefits of triple combination protection. Thanks to our first mover advantage, strong commercial relationships, and preferred position with key veterinary partners, these efforts are often reinforcing. Our leadership trio remains the trusted first choice for veterinarians and pet owners alike in this franchise.

Our alternative channel strategy, especially in the U.S., the largest market for parasiticides, remains a key source of diversification and differentiation, helping us meet customers where they are and driving stronger compliance by ensuring pet owners have convenient ongoing access to trusted products. We expect these dynamics to continue for the foreseeable future. More than 10 years since launch and with over 12 million dogs treated, our key dermatology franchise continues to deliver, growing 11% operationally, a testament to how durable true innovation can be. This quarter's performance was fueled by particularly strong results internationally, where we are seeing increased uptake among new patients and higher compliance. What continues to set this franchise apart is its depth and versatility. We didn't just create the derm category, we've continued to expand it with complementary treatment options that address a range of needs.

Apoquel Chewable provides added flexibility for pet owners, while Cytopoint is a convenient, injectable solution for longer lasting relief. Together, these modalities help vets personalize care, improve compliance, and deliver high satisfaction, reducing the likelihood of switching and supporting durable franchise performance. Even after a decade, we see meaningful runway ahead driven by two powerful dynamics: the continued importance of compliance in chronic disease management and the opportunity to reach more than 20 million dogs who remain under or untreated today. Our confidence is grounded in what sets us apart. We lead through science, designing solutions that address the most persistent needs in animal health and establishing a standard of care that's not easily surpassed. As we shared earlier this year, we're confident not only in our market-leading differentiated portfolio of today, but in the portfolio of the future already taking shape in osteoarthritis, or OA pain.

Librela declined 7% operationally this quarter. We are actively advancing efforts to accelerate adoption, grounded in both the scale of the opportunity and the positive patient impact we continue to see. In the U.S. alone, 27 million dogs suffer from OA, yet only 9 million are currently treated. Today we are reaching just 1 million of them. As with any breakthrough innovation that establishes a new standard of care, adoption rarely follows a straight line. That is why we are taking deliberate steps to develop the market, educating veterinarians and pet owners to ensure a clear understanding of the product's benefit-risk profile and to build lasting confidence. In fact, more than 75% of U.S. patients' parents report being extremely or very satisfied with Librela's results. Shaping a new market takes time, but we remain confident in our ability to deliver over the long term.

We see significant potential in Librela and will continue to invest in unlocking it because the need for chronic pain relief is significant, persistent, and deeply personal for our customers. It also reflects how we are thinking more broadly about sustaining growth through continued innovation, access, and differentiation globally. Across these franchises, more patients remain unaddressed than treated, and in many cases, the opportunity to expand care exceeds the current market, particularly outside the U.S. where rising pet ownership and medicalization are fueling demand for therapies that support longer, healthier lives, including among aging COVID pets. In livestock, demand for our portfolio remains strong, with 6% organic operational revenue growth led by double-digit gains internationally across species. This business remains an important driver, reflecting multiple years of strong execution and above-market performance. Broader industry dynamics, including rising U.S. protein consumption, continue to reinforce the long-term fundamentals.

This quarter we also advanced our pipeline with the conditional license of our avian influenza vaccine for use in lactating dairy cattle in the U.S. While the revenue impact is limited, it reflects our longer-term focus, a company built on purpose and powered by innovation. Altogether, these results highlight the strength and diversity of our portfolio, driving consistent performance from multiple sources across varying market conditions. Based on our strong first half performance and what we see in the current macro environment, we are raising our full year guidance for organic operational revenue growth to 6.5% to 8%. We are also raising our guidance for organic operational growth in adjusted net income to 5.5% to 7.5%, reflective of continued discipline in execution and cost management.

Looking ahead, we are well positioned to deliver our full year commitments supported by durable industry trends and our ability to adapt and execute with focus. Our consistent performance across economic cycles and competitive dynamics reflects the fundamental strength of our business, the breadth of our portfolio, and our commitment to delivering differentiated value. That resilience is grounded in the strength of our global manufacturing and commercial capabilities, enabling us to deliver reliably, scale effectively, and support our customers across geographies and market conditions. As we look to the second half of the year, our focus remains clear: execute with discipline, advance meaningful innovation, and stay deeply connected to the needs of our customers.

With a portfolio built to solve real world challenges and a pipeline aimed at raising the standard of care, we are well positioned to lead not just in the markets we serve today, but in shaping the future of animal health. Thank you for your continued support, and with that, I'll turn it over to Wetteny to walk through the financials. Wetteny.

Speaker 3

Thank you Kristin and hello everyone. In the second quarter we posted $2.5 billion in revenue, growing 4% on a reported basis and 8% on an organic operational basis, which excludes the impact of foreign exchange and the MFA divestiture. Adjusted net income of $783 million grew 10% on a reported basis and 10% on an organic operational basis. Our organic operational revenue growth was balanced, driven by 4% price and 4% volume. Our performance highlights our diverse and differentiated portfolio with strong growth across species, geographies, and channels. This broad-based growth underscores our ability to compete and win across the markets in which we operate and to generate durable returns in the face of competition and in challenging macroeconomic environments. Our Companion Animal portfolio posted $1.8 billion in revenue, growing 8% operationally globally.

On an operational basis, our Simparica franchise contributed $448 million, growing 17%, and key Dermatology posted $460 million, growing 11%. Our global Livestock portfolio contributed organic operational growth of 6% on $638 million in revenue. Our Livestock business has outperformed our expectations thus far this year, growing 7% on an organic operational basis year to date compared to low single-digit market growth projections. This also marks the fifth consecutive quarter of organic operational Livestock growth above 5%, signaling good momentum that we expect to continue through the remainder of the year. Now moving on to our Q2 segment results, U.S. revenue grew 4% on a reported basis and 7% on an organic operational basis. Companion Animal grew 9% and Livestock declined 2% on an organic operational basis. The U.S.

Companion Animal business was driven by the performance of our Simparica and key Dermatology franchises, partially offset by decline in sales of our OA pain maps. We have seen vet clinic activity improve throughout the quarter versus the lows in February, and as expected, our business continues to grow above the market despite increasing competition across two of our key franchises. Both Simparica and key Dermatology franchises benefited from strong alternative channel sales in the quarter. In addition to organic growth above the vet channel, we also saw tailwinds from certain retailers increasing their presence in the space. This increased presence will further expand the attractiveness of alternative channels that more and more pet owners are choosing for product fulfillment. Our Simparica franchise grew 18% in the quarter on $329 million in revenue.

Despite intense competition, Simparica Trio has not experienced year over year patient share loss since competition launched almost two years ago. During this time we have seen triple combination share in vet practices expand from 30% to 45% and our retail channel sales, which drive significantly better compliance and stickiness, have more than doubled. Simparica Trio remains the market leader in the triple combination space and the largest product in the largest therapeutic area in animal health. Key dermatology sales were $307 million, growing 9% with growth across both Apoquel and Cytopoint. With growth coming more from volume than price, we continue to see minimal patient share impact due to competition. We see the strongest growth in our Apoquel Chewable formulation, which provides easier administration than a film-coated tablet and remains differentiated from competitive entrants.

Lastly, as a reminder, we saw growth headwinds from the impact of our initial Apoquel Chewable stocking order in the prior year. This impact offset the new retail stocking tailwinds noted earlier. Additionally, our combined OA franchise declined 12% in the U.S. this quarter on $62 million in sales. Librela declined 16% on $45 million in revenue. As noted last quarter, our ramp up for Librela in the U.S. has not gone according to expectations with headwinds impacting product adoption and creating barriers for vet recommendations. As Kristin mentioned, our demand generation efforts remain focused on education to help vets and pet owners overcome perceived safety concerns with Librela. Additionally, we are working on phase four studies to reaffirm the safety and efficacy of Librela when compared to alternative treatments such as NSAIDs. These efforts will help our return to sustained growth and accelerate our trajectory.

We remain confident in Librela long term. Solensia declined 3% on $17 million in sales for the quarter. Organic operational declines of 2% in U.S. livestock are primarily driven by the timing of supply of Ceftiofur. Moving on to our international segment, revenue grew 3% on a reported basis and 9% on an organic operational basis. Companion animal grew 8% operationally and livestock grew 10% on an organic operational basis. International companion animal growth was driven by our key Dermatology and Simparica franchises. Our key dermatology franchise grew 15% operationally, posting $153 million in revenue internationally with strong performance across both Apoquel and Cytopoint. Our growth has been largely driven by the efforts of our field force, who have been instrumental in driving high engagement with our key corporate accounts. This has continued to expand the market through new patient adoption as well as improved compliance, especially in chronic cases.

We continue to see preference for differentiated products Apoquel Chewable and Cytopoint, both of which offer benefits in ease of administration and compliance compared to alternatives. Our international Simparica franchise grew 16% operationally on $119 million in sales with double-digit growth across both brands. Both brands continue to be among the fastest-growing parasiticide brands across international markets, gaining share despite growing competition. Simparica Trio grew 22% operationally on $55 million in sales, similar to what we are seeing in the U.S. where less than half of dogs prescribed a parasiticide by a vet are currently receiving triples. Many international markets have not yet adopted trio combinations as a standard of care, with 30% of our top 10 markets doing less than $1 million in TRIO sales this quarter. This represents a continued opportunity for market expansion for our Simparica franchise. Simparica contributed $64 million in sales, growing 12% operationally.

Our growth in both brands has benefited from strong key account relationships, driving stickiness among competitive conversion as well as increased utilization and expansion of the oral parasiticide market. Internationally, our OSPAs MABs grew 4% operationally on $83 million in combined revenue. International sales of Librela were $64 million, growing 1% on an operational basis. Despite high vet confidence in Librela in international markets, we are seeing impacts to new patient starts from social media headwinds, particularly in English-speaking markets. We have begun echoing our U.S. efforts internationally to address these concerns. Solensia sales were $19 million, growing 17% operationally in the quarter. We have seen high satisfaction and balanced growth across key markets and expansion into Latin American and Asian markets. International livestock grew 10% on an organic operational basis in the quarter with growth across all of our core species.

Performance was driven by swine partly due to tailwinds from China, which are timing related and will gradually normalize in subsequent quarters, as well as vaccine growth in Latin America. Additionally, saw strong performance in our fish portfolio driven by high demand for our vaccines across both Norway and Chile. Poultry growth came primarily from vaccine performance in the Middle East and Asia, driven by increased focus on vaccines. After our MFA divestiture, our cattle business benefited from price contributions, particularly in high inflationary markets. Now moving on to the P&L for the quarter, adjusted gross margins of 73.7% with 200 basis points on a reported basis. Foreign exchange had a favorable impact of 130 basis points. Excluding FX, we saw higher margins due to favorable impact of our MFA divestiture as well as benefits from price.

This was partially offset by higher manufacturing costs in line with our expectations, which have been improving as we work through inventory valued at prior year standards. Adjusted operating expenses increased by 5%. Operational growth was primarily driven by SG&A increases of 6% operationally, mainly due to the timing of advertising, promotion spend, as well as higher compensation related expenses. Operational R&D growth was 1% in the quarter, with higher compensation related expenses partially offset by lower project spend, primarily due to timing. Adjusted net income grew 7% operationally and 10% on an organic operational basis. Adjusted diluted EPS grew 9% operational in the quarter and 13% on an organic operational basis. Now moving to guidance for full year 2025. Please note that guidance reflects foreign exchange rates as of late July. Consistent with last quarter, our guidance does not include any assumed impact of future tariffs or policy changes.

The impact of currently enacted and assumptions on announced tariffs on our business is slightly higher than our estimate as of our May guidance update. However, we feel we can absorb the incremental impact for the year. We are guiding revenue between $9.45 and $9.6 billion and raising our organic operational growth to a range of 6.5% to 8% based on our strong first half performance. While our first half organic operational revenue growth of 9% is above our guidance range, we have highlighted all year that our guidance is reflective of headwinds from launch related competitive impacts in the second half of the year. There is still significant uncertainty on the timing of these events. Despite these temporary headwinds, we still see significant room for growth long term.

We have been pleased with the growth of our Cytopoint and Apoquel Dermatology franchises despite headwinds in pain and reiterate our expectation that these combined innovative franchises will grow double digits in 2025. This commitment, along with the strength we have seen in our livestock business, highlights the revenue diversity that is fundamental for our continued above market growth. We now expect adjusted net income to be in the range of $2.825 to $2.875 billion, reflecting operational growth of 5.5% to 7.5% on an organic operational basis. The increase in our expected adjusted net income is driven by improved margin expectations due primarily to lower manufacturing costs, the higher revenue outlook, and expense management, partially offset by the increased impact of tariffs.

Finally, we expect adjusted diluted EPS to be in the range of $6.30 to $6.40 and reported diluted EPS to be in the range of $5.90 to $6.00, consistent with prior guidance. Our EPS projections are based on current share counts and do not consider the future favorable impact of our ongoing share repurchase program. The first half of the year has not been without its challenges. We have navigated tariffs, an uncertain macroeconomic environment, competitive pressures, and challenges with Librela. Through all of this, we have driven cross-portfolio growth above our expectations. That has given us the confidence to raise our guidance as we progress into the back half of the year. We remain confident in our ability to meet our commitments as we have done time and again. Now I'll hand things over to the operator to open the line for your questions.

Speaker 2

Absolutely. At this time, if you'd like to ask a question, please press the Star and one keys on your telephone keypad. Keep in mind you may remove yourself from the queue at any time by pressing Star and two. As a reminder, we do ask that you limit yourself to one question and then requeue for any follow ups. Your line will be muted once you complete your question. Again, when posing your question, please pick up your handset to allow for optimal sound quality. We'll take our first question from Michael Riskin with Bank of America. Please go ahead. Your line is open.

Speaker 3

Great.

Thanks for taking the question and congrats on the quarter, guys. I want to start first with the dermatology franchises at a high level. You spent a lot of time talking about competition and how you've been able to retain meaningful share, not really seeing any incremental erosion. I'm just wondering if you've had any change in your go-to-market strategy in terms of how you approach things as you've seen more and more entrants in both of those markets. Are your competitors being more aggressive on price, and you called out retail alternate channels. Is that an area you're leveraging to sort of retain your first mover advantage in those markets? For the follow-up, I want to ask on Librela. Kristin and Wetteny, you guys both emphasize the steps you're taking in terms of medical education, post-launch studies, engaging with pet owners.

Just want to get a sense of your expectations on timing, when we'll see.

The benefit for that.

When do you think Librela can return to growth? If you think it can start growing again year over year later this year, or if this is more of a 2026 benefit?

Thanks. Thanks for the question, Mike. Look, we have been very pleased with the performance across both our key derm as well as Simparica and particularly Simparica Trio. As you know, we've been facing direct competition in Trio for a couple years now and you've seen the product just absolutely perform. In the quarter you saw Trio grow 20%, 19% in the U.S., overall Simparica franchise growing 18% on the quarter and following last year with the first full year of their competition, we grew 25%. As we've been highlighting for some time now, the triple combination space is still a relatively new standard of care that we set in the U.S. and we continue to lead it. Trio is the leading product across flea, tick, for heartworm combination. This is a market segment that grew 45% last year.

We continue to see strong growth and we expect to continue to see that end of the market continue to expand as consumers move from older therapies into triple combinations. Even with competitive entrants, we expect that to continue to happen as more awareness will be created by those. We're very confident in long term being able to do that. What I would say is in terms of our growth go to market on this, we have not changed anything. We remain very disciplined here. As you know, last year in particular we highlighted and we continue to see better price realization. We're being very targeted about how we do promotion that will drive long term growth and patient share in this space. This is why you have not seen us have any patient share loss in any quarter since direct competition has come on with Trio.

Again, couldn't be more confident and more pleased quite frankly with how we're executing on that front. Similarly with key derm, I mean we grew 17% last year, largely driven by volume. Of course we saw some price contribution there as well and you see some price consolidation this year. Key derm grew 11% on the quarter, it's 13% on a year to date basis. We have been saying for some time now, if you look at the market that's available to us unaddressed, either untreated or undertreated, it is bigger than the market we're treating today. That just spells for room for expansion here. That's before you even consider compliance which you're seeing nice tailwind from compliance, particularly as you mentioned in alternative channels where you see increase in compliance both for Trio as well as key derm. Again, markets quite large.

We are leaders in these markets with multiple products and we will leverage that leadership position, continue to drive our first mover advantage to continue to lead and grow long term in these spaces. Alec, Kristin, go ahead and take the Librela.

Speaker 0

Sure. Thanks, Mike. I really think by fundamentally improving the quality of life for dogs with OA pain, Librela is making a big difference. As we mentioned, over 75% of U.S. patients report being extremely or very satisfied with the product, and we are quite focused on how we accelerate the adoption of this. As you mentioned, we've been focusing a lot on medical education with vets. We've been partnering with key opinion leaders. We even brought in some of our top vets from Europe who've had the product for over four years to do a tour in the U.S., which has been quite impactful. We're also, as we talked about before, launching a number. We're doing some third-party studies. They're underway right now. They should be reading out beginning in Q4 of this year and into next year.

We really think this will help provide even more clinical validation and support, a broader understanding of the product, and ultimately adoption. We're also engaging directly with pet owners to educate them on the burden of osteoarthritis and to build awareness and demand. We remain very committed to this. We're seeing the positive impact that Librela is having, and we're confident in the long-term potential of this product, and we continue to be confident in the safety and efficacy.

Speaker 2

We'll take our next question from Erin Wright with Morgan Stanley. Please go ahead. Your line is open.

Speaker 3

Great, thanks.

Speaker 0

It's a little early to talk.

About 2026, just in light of the evolving competitive landscape as well as the innovation you have in the pipe, I guess how are you thinking about your ability to still achieve high single digit, 6 to 8% kind of operational growth next year and some of those just like higher level headwinds and tailwinds as we head into not only the second half but also next year. Second question is on margins were stronger in the quarter, I guess can.

You speak to some of the areas.

That you continue to address from a cost management perspective, how do you think about the quarterly progression from an operating margin standpoint from here, where there's some timing benefits or other dynamics at play in terms of the operating margin in the quarter.

Speaker 3

Thanks.

Speaker 0

Thanks, Aaron. I'll start and let Wetteny build on this. I think what you've seen in the first half this year that we keep underscoring is the broad-based results that we're delivering. They're led by the innovation in our portfolio and also excellence in our execution. When we talk about the diversity and durability of our portfolio, that's across markets, it's across species, our pipeline, and we really believe this positions us for above-market growth over the long term. We've also said that we expect a major market approval every year for the next few years across our pipeline. We remain quite confident that we are a secular grower with really strong fundamentals driving not just the industry, but importantly Zoetis, with our pipeline. Wetteny, if you want to build on that and also address your question on margin.

Speaker 3

No, look, I appreciate the question and certainly we're smiling as knowing that it's a bit early to get into any specifics, but I agree. I think the breadth of our portfolio and diversification is what's been really driving our execution and expect that to continue as we move ahead. As I mentioned in a prior question from Mike, significant room to expand across our portfolio and you've seen really strong momentum in livestock, right? I mean you saw growth in livestock in the quarter at 6% following 5% and 6% respectively the last couple of years. We see that momentum continuing, so these are all elements that we are considering as we build our plans going into next year. On margins, I think you saw margins have played out at least in gross margins, largely as we expected coming into the year, marginally favorable.

As you look at the second quarter, as we said last quarter and when we gave guidance, we do see manufacturing costs being higher as we work through inventory that was built last year and that gets better as we go into the second half. That remains the case for us. We're coming off of the second quarter where we saw that play out again slightly favorably to our plan. You did see U.S. drive 10% growth in adjusted net income on the quarter, really leveraging through cost management. We'll continue to be very mindful and disciplined about how we do that while we keep investing in the long term. I think that's really the balance that we continue to achieve and we've demonstrated we're able to do.

On top of that, you saw at the EPS level the contributions from our share buybacks we have continuously done on a regular basis consistently. As we guide, as you raise the guidance here, we continue to not include any forward buybacks in that. It's only the share count as we exit the current. Those are all elements that will play out. Nothing to note specifically in terms of how that might play out across the second half, I would say. I would mention in terms of pipeline, you are coming up against a very strong third quarter for us versus last year. Just to remind you, companion animal grew 15% last year. In the third quarter, the U.S. companion animal grew 18%.

Our assumptions, of course, as we look at the back half of this year in terms of timing of competitive insurance, particular for Durham, is largely in the fourth quarter. You kind of have to balance those out in terms of how they play out for the rest of the year.

Speaker 2

We'll take our next question from Brandon Vasquez with William Blair. Please go ahead. Your line is open.

Speaker 3

Hi everyone. Good morning. Thanks for taking the question and congrats on a nice quarter. I'll ask two kind of upfront here. One is just to follow up on Librela. I'm just kind of curious. Can you talk a little bit about what you're hearing on Librela? Why the slowdown? I think we talked a lot about the positive clinical data around this. I think you even have a randomized control trial for Librela that actually read pretty positively against traditional oral medications. What are you hearing from the doctors so we can better understand what vets want to see and know in order to accelerate the usage there? The follow up question I'll ask quickly here is, is there anything more brand new or Kristin, you can give us in terms of pipeline, life cycle innovation, anything like that that we should expect?

Probably, let's call it over the next 12 to 18 months just to give investors an idea of what kind of drivers there can be for growth. Thank you.

Speaker 0

Thanks, Brandon. I mean, look, what we continue to hear is the difference that Librela is making in the dogs that it's going into. As we talked about a little earlier, pet owners are, you know, 70, over 75% of them are extremely or very satisfied. Clearly, the performance of Librela has been lagging our expectations. We've certainly faced headwinds that have really impacted patient adoption and the willingness of vets to recommend. What vets are saying is, can you empower us with better data to have those conversations? That's why we've really been focused on the sort of vet education and, importantly, investing in several third-party studies that will give the vets the data they need and they feel they need to better understand the product and to really drive the accelerated adoption of the product. That's primarily what we're hearing from vets.

With regards to the pipeline, we don't have any new updates versus what we provided at JPMorgan this year. I do want to underscore, we are expecting a significant approval in a major market every year for the next few years. We talked about long-acting osteoarthritis pain for this year for dog and cat. We talked a lot about what we're expecting in the next 12 to 36 months. You've got approvals within that timeline for long-acting Cytopoint as well as renal, et cetera. We have a strong pipeline. We are expecting a major approval every year in a major, major market. We remain very, very excited about that pipeline. I want to underscore that these markets we're talking about are significant markets. Renal is a $3 to $4 billion market. We talk about oncology, over $1.5 billion market, even cardiology.

These are new markets really where very few products exist today. In renal, actually, there really are no products other than palliative care. I think what we continue to demonstrate is our ability to identify opportunities and unmet needs and then deliver new markets. We're really excited about that pipeline.

Speaker 2

We'll take our next question from David Westenberg with Piper Sandler. Please go ahead. Your line is open.

Hi. Thanks for taking the question. It just increased competition in oral dermatology. Are there any strategies that are to actively leverage and promote Cytopoint? The objective will be injectable alternative in order to maintain and potentially grow market share in the overall dermatology franchise. I know you've mentioned about these under medicalized pets. Is there an opportunity with Cytopoint to kind of go after these and highlight the differentiated benefits of that? Could you just remind us what the growth rate of Cytopoint is versus the orals? Specifically, have you seen any slowdown in biologics or injectables as a category? For my second question, I just wanted to get a clarification on the contract manufacturing, human health. There's a big step up there. Is that something just one time or is that something that's going to occur?

Speaker 3

Thank you.

Speaker 0

Sure. I'll start on the derm and let me build on that and then move to your question on contract manufacturing. I first want to underscore that we have three unique offerings in this space and we believe all three, to be honest with you, remain highly differentiated. If you look at Apoquel, I don't think you really underestimate the importance of over 10 years of safety and efficacy data on that product. As you think about chewable, that is a really convenient way to provide Apoquel for pet owners. It doesn't have to be taken with food. It's incredibly palatable. It's not bitter. I think that remains differentiated and Cytopoint. We're also investing in a pipeline to support this. We're also, as we talked about, expecting approval in the 12 to 36 month time frame for Cytopoint long acting. We're going to continue to invest across this.

All three have a unique position. Cytopoint still remains a preferred solution for many vets. It provides long acting relief. It's very convenient for many of them. It eliminates the need for compliance and things like that for a lot of pets with chronic issues. We're going to continue to invest behind all three because as Wetteny underscored, there is still more of a market to create than exists today. We're really focused on growing that market and growing adoption of all of our products which we believe remain differentiated even in the current landscape. I don't know if there's anything you want to build on that Wetteny on derm and take his follow up. Sure.

Speaker 3

Look, the only thing I would mention is we do talk about the 20 million that are either undertreated or not treated at all. By the way, we are speaking of medicalized dogs here. This is an addressable market that's out there for us to continue to penetrate. The point is this is not just something we're talking about that's going to happen in the future. We have been addressing this and we have been expanding the market. We're saying we're going to continue to do that. If you look at last year where dermatology grew 17%, the volume growth is double digits. That spells that we are extending the market both in terms of new patients and compliance are both contributing to that. I think that's really important as we talk about what's going to continue to happen. It's not something that has not been already underway.

On contract manufacturing, it's still a relatively small number. I know it moved sort of a higher percentage here, but we're still talking very small for the company. It used to be actually a bit higher. It's come down a bit. You saw a little bit of pickup, but nothing specific to note on that one.

Speaker 2

We'll take our next question from John Block with Stifel. Please go ahead. Your line is open.

Thanks, guys. Good morning.

Speaker 3

Nice quarter. Just a couple.

What was the companion animal growth in the alternate channel for the quarter, if I've got that framing correct, and then is there a way to quantify some of the stocking? I believe that you referenced earlier in the call.

Just any details you can give there. Chris, anything on international Librela? We're sort of familiar with the struggles or some of the issues in the U.S., but internationally it's been.

Quieter, I think, just from like a headline perspective.

Yet we did see the growth rate.

Decel and sort of flatlining, if you would, year over year. Any comments there? Thanks for the color, guys.

Yeah, I'll start with alternative channels. We have seen really strong growth here. This is one of the elements of our strategy in terms of omnichannel where we are meeting the pet owner where they are. This has been continuously and consistently driving growth for us, which is why again when we talk about what's happening in the clinic, you also have to bring that piece in. Alternative channels are now about 22% of our total U.S. companion animal and has been growing in the mid 20% range, which is what we saw in the quarter between 25% and 30%. What you referred to in terms of the stocking was specifically within retail.

When we speak in terms of alternative channel, both retail as well as home delivery, on the retail side, we did see some stocking from a customer that is building position to again continue to drive this momentum that we talked about in alternative channels, which by the way helps with compliance, which is a very big advantage going that way. That was largely, if not entirely, offset, particularly when you look at Derm with what we spoke of last year, which is the launch into distribution for Apoquel Chewable. We talked about that being a headwind for the quarter. In fact, reality became muted, offset by this element. So roughly around the same. Again, no contribution there.

I would say as you look at these puts and takes, whether it's this one on the retail side, alternative channel, or China, where we did, due to tariffs, see a bit of an uptick in the quarter that we talked about, that'll work itself out through the next couple quarters, or supply in the U.S. for livestock, which is timing, when you put all these together, they all wash themselves out and it becomes a very straightforward quarter in terms of what you saw from.

Speaker 0

Just to answer your question on Librela and international, we're continuing to see really strong information from both vet and pet owners around how Librela continues to make a strong, significant difference in dogs' lives. I think what you saw in the quarter is some of the bleed over from some of the U.S. headwinds. I think our strategy to address it is, you know, really where you saw some of the slowdown was in the English-speaking markets, whereas, you know, some of the social media sort of bleeds over there. We're really focused on the same strategy you see in the U.S., which is providing these vets greater third-party data to really underscore, you know, the difference it's making clinically to build their understanding and to drive and accelerate adoption. The strategy in international is the same as the U.S. They've got more experience as you've seen there.

We're already moved not just from severe but into moderate dogs international and we're really focused on continuing to grow that. Most of the headwinds we saw were really more the English-speaking markets and international in the quarter. We really remain confident in the long-term potential globally for this product certainly in international, but also in the U.S.

Speaker 2

We'll take our next question from Chris Schott with JP Morgan. Please go ahead. Your line is open.

Speaker 3

Great.

Thanks so much for the questions. I just want to come back to parasiticides.

I think you mentioned in the U.S.

You've now moved to about 45% share in vet practices for triples.

I was just in terms of where.

You think that market can go over time. Kind of what inning of the transition to these newer products are we currently in, and maybe also sticking on parasiticides? It sounds like there hasn't been much.

Of an impact from Quattro, can you just elaborate a bit more what.

You're seeing competitively with that new entrant coming this year. Thanks so much.

Sure, Chris. I'll take a call. Look, in terms of parasitic size, as we've talked about, this is really an exciting end of the market that has the potential for more room to expand. As we said in January, we expect the continued move into triple combinations. You saw that increase significantly through the red channel and clearly happening across alternative channels as well. We expect triple combinations to double by the end of 2028. That gives you a pretty strong trajectory which we are seeing play out both again last year and this year. As the first mover here in the U.S., the largest market, we continue to be well positioned. I think you see it also show up in terms of puppy shares. Right.

About 60% of puppies are immediately going right onto a triple combination in addition to those that will convert over time from older therapies to triples. We are seeing this play out, which is why the second part of your question in terms of what we're seeing from Quattro has been relatively small in terms of anything there. Given a very high growth in this segment as that market expands, more entrants will do more advertising, more awareness to DTC that triple combinations are the latest and the care will drive more traffic to the clinic where we have an advantage and very high level of satisfaction for our products to be in the market for about five years.

Speaker 2

We'll take our next question from Steve Scala with TD Securities. Please go ahead. Your line is open.

Speaker 3

Thank you. This is Chris on for Steve Scala. On tariffs, has animal health been granted an exemption from recently announced EU pharma tariffs? At a high level, are you seeing any impact of the overall tariff environment on consumer share of wallet spent on animal health, on the share of consumer pet spending dedicated to vet visits and animal health plans? Thank you.

Speaker 0

Sure. Thanks, Chris. Look, I think the tariff environment obviously remains dynamic. I want to underscore that specifically animal health is incredibly resilient with strong secular trends. I think what we're really leaning into is our scale, our diversification, our robust supply chain and portfolio, which gives us confidence in our outlook not just for this year but going forward. Specifically with regards to your question on are we included, it's not clear, as you probably heard from other pharmaceutical CEOs, it's not clear on the announcement, for example in the U.K. when that takes place, what is exactly in what it applies to. I want to underscore animal health is different than human health. Specifically, Zoetis is different than most human health companies. If you think about our manufacturing, 60% of our global manufacturing is in the U.S. We've been investing in U.S. manufacturing for years.

If you think about what we sell in the U.S., 75% of what we sell in the U.S. we make in the U.S. We don't have third party payers. We've got a very diversified supply chain. We've been spending a lot of time in D.C. advocating for the fact that if they are looking at 232 for a national security issue, we don't think that applies to animal health. Obviously, the decision on 232 has not come down yet. We do not know whether we have been excluded. It still remains pretty unclear with regards to the announcement, even with regards to Europe as to where that stands. We've embedded in our guidance for the year anything that's already been enacted or what's announced and we're pretty confident that we can manage costs.

We've got the discipline to deliver on the result on the guidance we gave earlier even in that environment. Again, we are a strong resilient industry. We've got multiple strategies to address this over multiple time horizons.

Speaker 2

As a reminder, if you would like to ask a question or if you have any follow up questions, you can register by pressing STAR and one on your telephone keypad. We'll take our next question from Navon Thai with BNP Paribas. Please go ahead. Your line is open.

Speaker 0

Hi, good morning, thanks for taking my questions. One pipeline question. Do you still expect approval of the long-acting pain this year? How is the dialogue with the FDA and or the EC? We know that the long-acting will be marketed under a different brand name than Librela and better dosing and COGS. Could you discuss your expectation on the safety profile if possible? Thank you. Sure. We are still expecting approval in a major market for OA pain similar to the guidance we gave before this year for both OA pain in dog and in cat. To answer your question, this new long-acting monoclonal antibody for OA pain will be a three-month product that would have a longer duration, which we really think gives both vets and pet owners a more convenient option.

It is a new antibody as you mentioned before, and it's targeting a unique binding site, which we believe will lead to longer-lasting effects with a 10x lowered dose. We are obviously in current conversation, so I certainly can't comment on a label that does not exist yet. We're very excited for this, and our guidance for an approval this year has not changed.

Speaker 2

We'll take our next question from Dan Clark with Leerink Partners. Please go ahead. Your line is open.

Speaker 3

Great, thank you. Appreciate the color that you now expect. You know the competing launch in Durham to be in 4Q. Just wanted to clarify, was that always when you expected to launch and if that's changed like how did that impact your expectations for the year? Thank you. Yeah, look, we have been very consistent though. Our approach to guidance as always is we expect certain launch related promotional activity, which are not long term in nature, to happen when there's a launch. When we come into guidance, we model a number of scenarios across the spectrum both in terms of the time horizon as well as what the label might look like and how aggressive a competitor might be again in that short term window for launch. It puts us across the spectrum similar to the range of guidance that we give.

It was always in the back half of the year with various scenarios that span across that. As we learn more, we continue to fine tune those as well. That all is reflected in the guidance that we gave today, by the way, which includes a raise both at revenue, adjusted net income, considering these areas as well as the current macro environment that we're operating in.

Speaker 2

We'll take our next question from Sid Sahu with HSBC. Please go ahead. Your line is open.

Speaker 3

Sure. Thanks for taking the question. Congrats on the quarter. I just wanted a quick clarification on the OA Pain franchise as in earlier in May you said that you had clubbed it under other franchise expected to grow double digit this year. What is the correct expectation in the second half? My second question would be slightly longer term, how do you see a faster bottom line growth in terms of when most of the portfolio is basically maturing, where are the opportunities to control cost? Thank you. Yeah, the sound wasn't great, but I think I got the gist of the question. We came into the year indicating that we expect our key franchises, so this is across Derm, Simparica as well as OA Pain combined, will go double digits. You saw us post 14% growth in the first quarter.

Across those, 11% growth in the second quarter, including the performance from Librela, which we said was below our expectations, we still deliver double digits. In the prepared commentary, we are indicating we continue to expect double digit growth across those three. We have not given product specific guidance. Your question related to OA Pain specifically, this is consistent with how we've approached guidance and we won't go into specific expectations for that but maintain our expectation for double digit growth across the key franchises. I think the second question you asked, certainly we remain very disciplined. We continue to look at ways to manage cost across the landscape. That also is important as we continue to look at driving investment in areas that we see growth for the business. However, I will particularly address one piece, which is maturing portfolio. I couldn't look.

I think if you look at across our key franchises I just spoke about, as I mentioned earlier, when we look at the addressable market and we size the addressable market, by the way, in terms of medicalized tests, so they're already seeing that on a regular basis. They're very much attainable. We're saying that size is greater than what we are currently serving today. That gives us ample room in these areas. The fact that Derm has been around, we revolutionized the space, you know, 11 years ago and we're continuing to talk about how much more room there is to grow because in animal health it does take longer to build these markets and we continue to expand them as we've demonstrated time again. This is not a signal that these markets are mature and we have differentiated products across them.

That's not the reason to be disciplined around cost management. That is just good business and to drive delivery to our customers and continue to innovate.

Speaker 2

There are no further questions on the line at this time. I'll turn the program back to our CEO Kristin Peck for any closing comments.

Speaker 0

Thank you. As always, I want to thank everybody for joining the call today and obviously for your questions. I hope what you saw in our performance and in our discussion today is that our strategy is clear. We are customer first and purpose led as an organization, and we've been able to adapt. We are really built to adapt, and we really strongly believe this positions us for sustainable long term growth, which will create enduring value for our shareholders. You know, as a leader in what we think is still a very young and fast growing industry, we have set the standard for innovation and execution. We've been outperforming the market in a complex environment, and we're continuously raising the bar to meet the evolving needs in our industry. I really think this quarter's performance is a direct result of our colleagues' efforts around the world.

As we came together in July to celebrate Purpose Month across Zoetis, it was really honestly a powerful reminder of our shared purpose and how that, you know, can deliver for animals and for the people who care for them and the communities we serve. Thank you all so much for joining us today. We look forward to continuing the discussion.

Speaker 2

This does conclude the second quarter 2025 financial results conference call and webcast for Zoetis. Thank you again for your participation, and you may now disconnect.