Q3 2024 Earnings Summary
- Zoetis has a strong history of outperforming the market by 3 percentage points on average over a decade and is very confident in continuing to outperform the industry due to its robust existing portfolio and continuous investment in innovation.
- Key products like APOQUEL demonstrate impressive growth, with 16% growth in the quarter, driven by 11 years of safety, 90% satisfaction rates, and significant market opportunity with millions of untreated or undertreated dogs.
- Alternative channels are significant growth drivers for Zoetis, up 34% year-over-year in the quarter, reducing dependency on clinic visits and driving higher compliance.
- Concerns about Zoetis' ability to maintain above-industry average sales growth based solely on current on-market products without contributions from the pipeline or business development, which could impact long-term growth sustainability.
- Increased competition in key product areas, such as new entrants challenging Apoquel (e.g., Zynrelia), could slow down growth or require additional promotional activities, impacting profitability.
- Declining veterinary clinic visits may affect prescription growth for Zoetis' products, as initial prescriptions often occur during visits, possibly necessitating increased promotional efforts in alternative channels that could affect margins.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +11% | Strong demand for companion animal products, particularly monoclonal antibodies for osteoarthritis pain and parasiticides, along with price increases across product lines. Partially offset by foreign exchange headwinds in certain international markets. |
U.S. Segment | +15% | Growth driven by increased sales of companion animal products (e.g., Librela, Solensia) and improved supply for livestock products, especially in cattle and swine. Market conditions remained favorable compared to supply constraints in the prior period. |
International Segment | +7% | Operational gains in companion animal (mAbs, parasiticides) and livestock (fish vaccines, cattle products) were partially offset by unfavorable foreign exchange. Emerging markets showed mixed trends due to economic conditions. |
Companion Animal | +14% | Expansion of innovative therapies like Librela and Solensia and sustained strength in dermatology (Apoquel, Cytopoint) and parasiticides drove higher volumes and prices. Continued adoption in both U.S. and international markets propelled growth. |
Livestock | +6% | Higher cattle product sales resulting from better supply and price increases, along with fish vaccine momentum, contributed. Moderated by lower demand in some poultry segments and economic pressures in certain regions, compared to last year’s disruptions. |
Other Pharmaceuticals | -46% | Largely impacted by product portfolio changes and potential reclassification or lower demand in certain categories. No major new product introductions in this segment, creating a YoY comparison gap. |
Operating Income (EBIT) | +22% | Improved margins from price increases, a favorable product mix, and disciplined cost management boosted EBIT. R&D and SG&A costs rose, but were outpaced by revenue growth compared to the prior period. |
Net Income | +14% | Revenue gains and margin enhancements lifted net income, despite higher R&D expenses and restructuring costs. Ongoing investments in new product launches and strategic initiatives suggest positive momentum heading into future periods. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | FY 2024 | $9.1B - $9.25B (9% - 11% growth) | $9.2B - $9.3B (10% - 11% growth) | raised |
Adjusted Net Income | FY 2024 | $2.64B - $2.69B (13.5% - 15.5% operational growth) | $2.67B - $2.695B (13.5% - 14.5% operational growth) | raised |
Adjusted Diluted EPS | FY 2024 | $5.78 - $5.88 | $5.86 - $5.92 | raised |
Reported Diluted EPS | FY 2024 | $5.35 - $5.45 | $5.33 - $5.39 | lowered |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q3 2024 | 9% to 11% operational growth for FY 2024 | $2,388M (up ~11% YoY from $2,151M in Q3 2023) | Met |
Reported Diluted EPS | Q3 2024 | $5.35 to $5.45 for FY 2024 | $1.51 (up ~17% YoY from $1.29 in Q3 2023) | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Librela | Cited strong U.S. and international growth in Q2 ($53M U.S.), Q1 ($40M U.S.), and Q4 ($44M U.S.) with rapid market adoption. | Achieved $55M U.S. sales, reached 85% penetration; remains a key OA pain growth driver. | Consistent topic across periods, with ongoing positive sentiment and large impact on future growth. |
Simparica Trio | Q2: $254M U.S. (+19%) ; Q1: $205M U.S. (+61%) ; Q4 2023: $185M U.S. (+17%). | $237M U.S. revenue (+29%); #1 vet-prescribed parasiticide; growing share in puppies. | Repeated high growth, positive sentiment maintained against competition, large future potential. |
Dermatology franchise (Apoquel, Cytopoint) | Q2: +18% operational, strong Apoquel/Cytopoint ; Q1: +27% U.S., conversion to Apoquel Chewable ; Q4 2023: $375M globally (+7%). | International $146M (+13% operational); strong Apoquel performance (+16%). | Consistently strong results; sentiment remains positive, key franchise with room for further expansion. |
Hyperinflationary pricing in Argentina | Q2: Contributed 2% to overall price growth ; Q1: Added 200 bps to YoY growth ; Q4 2023: Two major FX drops in 2023. | Mentioned pricing but net impact outweighed by FX, creating headwinds. | Ongoing topic; sentiment neutral given volatile environment; continued FX-related challenges. |
Divestiture of MFA business | Q2: Expected to close in 2H 2024 ; Q1: Announced divestiture strategy ; no mention in Q4 2023 [—]. | Closed sale to Phibro; impacts Q4 with reduced revenue. | Previously mentioned, now completed sale; sentiment positive as focus shifts to core high-growth areas. |
Economic weakness in China | Q2: Ongoing challenges, affecting companion animal and livestock ; Q1: Reduced spending and swine volume ; Q4 2023: ~0.5-pt drag on growth. | Cited a 1-pt negative impact on growth, expects normalization going into 2025. | Consistent headwind; sentiment cautiously improving as stabilization is expected soon. |
Veterinary capacity constraints | Q4 2023: Acknowledged as a global challenge, but not significantly impeding product growth. | No mention in Q3 2024. | Previously cited, not addressed this quarter. |
Potential Librela label changes | Q2: Ongoing discussions with FDA; prior label changes in EU/UK did not hinder growth ; no mention in Q1 or Q4 [—]. | No mention in Q3 2024. | Topic raised previously, not discussed in current period. |
Competition from new entrants (Zynrelia, Credelio Quattro) | Q2: Minimal effect anticipated, with strong label positioning ; Q1 and Q4 2023: Similar confidence, expecting new entrants to expand categories. | Zoetis remains confident, highlighting Apoquel’s 11-year safety and Simparica Trio’s market share. | Unchanged positive sentiment; sees competition as market-expanding rather than a major threat. |
FX headwinds | Q2: Unfavorable ~130 bps on gross margins ; Q1: 180 bps drag on margins ; Q4 2023: ~80 bps margin impact, $0.07 EPS headwind. | Negative impacts across P&L despite price actions in hyperinflationary markets. | Consistent challenge each period; sentiment remains neutral as FX is uncontrollable but recognized. |
Margin expansion and operational efficiencies | Q2: Gross margins at 71.7% (FX headwinds offset by mix/price) ; Q1: ~70.7% (FX impact offset by efficiencies) ; Q4 2023: Guided ~100 bps margin expansion for 2024. | Adjusted gross margin +20 bps, net income up 15% operational ; leveraging past investments. | Ongoing focus; sentiment positive with steady margin growth and efficient spending. |
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2025 Growth Outlook
Q: What are the growth drivers and headwinds for 2025?
A: Management is confident in continuing to outperform the animal health market in 2025, with several sources of growth, including strong demand across key franchises like dermatology and Simparica Trio. Despite anticipating more normalized pricing, they expect pricing contributions slightly above their historical rate of 2–3%. They also foresee China becoming more normalized, reducing this year's headwinds. The removal of MFAs will impact comparisons, as they will be cycling three and a half quarters of MFA revenue in 2024. -
Impact of MFA Divestiture
Q: How will the MFA divestiture affect 2025 financials?
A: The MFA business, which generated approximately $400 million in revenue last year with about 30% margins, is being divested. This will affect 2025 financials as the company will be comping against three and a half quarters of MFA revenue from 2024. Management provided seasonality details, noting it's roughly linear, and advised that the impact can be calculated based on the provided figures. -
Pricing Strategy Confidence
Q: Can you maintain above-average price increases next year?
A: Management is confident in their ability to continue taking price increases, focusing on product-by-product differentiation and the value their innovations bring. Excluding Argentina, they have achieved price growth of 4.5% to 5% across their portfolio this year, contributing to significant volume growth. They believe this approach, along with their diverse and innovative portfolio, supports ongoing pricing power despite competitive and macroeconomic factors. -
Competition Impact on Apoquel
Q: How will new competition affect Apoquel's growth?
A: Management remains very confident in Apoquel's continued growth despite new competition like Zynrelia. They highlight Apoquel's 11 years of safety, high satisfaction rates around 90%, and strong efficacy. The focus will be on growing the category, addressing under-treated dogs, and maintaining current promotional strategies without significant changes due to competition. -
Simparica Trio Performance
Q: Why is Simparica Trio outperforming amid competition?
A: Simparica Trio continues to excel, being the #1 prescribed parasiticide and used in over 13 million dogs. Its global growth of 27% is attributed to its first-mover advantage, comprehensive coverage, convenience as a chewable, and effective commercial execution, including leveraging alternative channels, which now account for about 20% of sales. Management expects strong momentum to continue into 2025, with the market expanding as new entrants promote the oral flea, tick, and heartworm segment. -
Sustaining Above-Industry Growth
Q: Can you maintain growth without new pipeline contributions?
A: Management is confident in sustaining above-industry growth based on their existing portfolio and continued lifecycle innovation. They emphasize their history of outperforming the market by 3 percentage points on average over a decade. Building and expanding markets through innovation and defending established standards of care contribute to the resilience of their growth strategy. -
Librela's Growth Prospects
Q: What are the expectations for Librela's sales progression?
A: Librela is the company's most successful launch, achieving 123% global growth and reaching 1 million patients in the first 12 months. With an 85% penetration rate in the U.S. and over 90% globally, there's significant runway for growth, considering 8 million dogs are still on NSAIDs. Management expects continued strong growth into next year, although they note seasonal trends with peaks in Q2 and variations in subsequent quarters.